Demand Strong But Prices Slipping

Property Market Update for Week Ending 14 May 2017 

Key Property Market Highlights: 

• Early reports indicate buyers passed a crucial test this week, with demand strengthening even as the supply of available auctions surged.
• Median home prices in Sydney and Melbourne are still falling week-on-week.
• Some investors may see interest rates rise again soon.

This Week’s Preliminary Auction Activity (Week Ending 14 May)

The combined capital cities were host to 2,376 auctions this week, with buyers lifting the preliminary auction clearance rate to 76.2 percent. Last week, the final clearance rate was 73.0 percent on auction volume of 1,689. Over the same weekend last year, both supply and demand were weaker, with only 69.5 percent of 1,876 auctions clearing successfully.

Source: CoreLogic

In Sydney, auction volume surged from 592 auctions last week to 938 this week. Buyers rose to the challenge, snapping up 79.4 percent of available stock. Last week’s final reading was 73.8 percent.  This week last year, the clearance rate was 76.2 percent across 647 auctions.

Melbourne remained the busiest city, with auction volumes rising from 792 last week to 1,092 this week. This week’s preliminary result was 76.8 percent, which is lower than last week’s clearance rate of 77.5 percent. Over the corresponding weekend last year, 871 properties were offered at auction and 71.3 percent were successful.                     

Adelaide and Canberra also achieved preliminary results above 70 percent on relatively strong auction volume.

Last Week’s Final Auction Results (Week Ending 7 May)

Once again, Sydney’s final auction results from last week have come in four percentage points lower than the preliminary numbers reported by agents earlier that week. While the inflated clearance rate makes for better news headlines, for those who watch the market closely, it shows how untrustworthy the initial reporting can be.

Here’s the graph from CoreLogic showing last week’s final auction results for the capital cities:

Source: CoreLogic

For the historical data of weekly auction clearance rates, click here.

Recent Price Movements

CoreLogic’s daily home value index data shows that home prices in Sydney and Melbourne continue to trend down from their mid-April peaks, now approaching the levels of early March. Sydney lost 0.4 percent last week and Melbourne was down 0.72 percent on the week.

Here’s CoreLogic’s most recent data for all of the capital cities:

Source: CoreLogic

Property Market Analysis

On the surface, it appears the property market remains very strong in our largest capital cities. To a degree that’s true. Auction clearance rates above 70 percent have traditionally been associated with rising home prices.

However, as indicated above, the final auction results for Sydney are not typically as rosy as they’re made out to be in the preliminary reporting. If the clearance rate falls four percentage points again by Thursday, we’ll be looking at a result in the mid-70s rather than high-70s.

Furthermore, the fall in prices points to the likelihood that although clearance rates remain high, vendors may be adjusting down their reserve prices to ensure their properties clear successfully. In other words, demand is strong, but it seems to be retreating as buyers are showing a little more restraint.

Expect an even greater test of demand next week as auction volume is projected to surge even higher. Sydney will be host to 1003 auctions next week, and Melbourne will be very active, with 1222 auctions scheduled.

This could indicate that supply is being pulled forward as homeowners decide to sell sooner rather than later in hopes of getting the highest possible price amidst concern the market may have topped out. If so, that would mean there will be fewer homes for sale in the Spring, which could serve to prop up clearance rates later in the year.

 What It Means For Investors

Steve McKnight wrote a helpful article last week detailing the changes property investors can expect after the budget announcement. While foreign investors were easy targets and hit the hardest, a broader impact could come in the form of higher interest rates from the Big Four (plus Macquarie) thanks to the Government’s new bank levy.  

If you already have a loan with one of these banks, it may be time to refinance with a smaller lender.

Higher interest rates for investors are also possible if APRA further tightens bank capital controls in coming months. Unless our economy starts growing faster, the RBA will likely cut rates again. If so, APRA will need to act quickly to direct a new wave of ultra-cheap credit away from the housing market.

Assuming our regulators have their way, home price growth will flatten out for the foreseeable future. If that’s how you expect the next few years to play out, stay away from investment properties that produce a cash flow loss and focus instead on value-add strategies like renovation or subdivision.

If you’re not sure how to find those deals or if you’re looking for a great opportunity to skill up, don’t miss Steve McKnight and his guests at PropertyInvesting.com’s upcoming 2017 Millionaire Mega Conference in Sydney, September 15, 16, and 17.

Why do you think home prices have been falling while auction clearance rates remain high?

Take a moment to share your thoughts by leaving a comment below. 

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.