Don’t Buy In To The Hype – Home Prices Are At Best Levelling Off
Property Market Update for Week Ending 21 May 2017
Key Property Market Highlights:
- Auction supply surged but demand appears to have kept pace.
- Melbourne just recorded its lowest auction clearance rate for the year.
- Capital city home prices are still falling week on week.
- The recent headlines are overly hyped. Demand is strong, but it’s not quite as competitive as agents would like you to think.
This Week’s Preliminary Auction Activity (Week Ending 21 May)
Supply surged again this week, with the number of auctions across the combined capital cities increasing from 2,409 last week to 2,794 this week. The preliminary clearance rate jumped significantly, despite the higher volume. Initial reporting shows 77.2 percent of this week’s auctions found a winning bidder. Last week the final clearance rate was 72.8 percent. Over the same weekend last year, both supply and demand was weaker, with 68.9 percent of 1,920 auctions clearing successfully.
Sydney | Melbourne | Brisbane | Adelaide | Perth | Tasmania | Canberra | |
Clearance Rate | 80.7% | 79.2% | 51.6% | 70.4% | 50.0% | 80.0% | 75.3% |
Auctions | 1053 | 1323 | 160 | 114 | 48 | 11 | 85 |
Source: CoreLogic
Sydney looked strong with 1,053 homes taken to auction and agents reporting a preliminary clearance rate of 80.7 percent. Last week, the final clearance rate was 74.5 percent across 960 auctions. During the same week one year ago, sellers offered up 735 homes at auction with 73.2 percent finding a winning bidder.
The Melbourne market was most active. Auction volumes rose to 1,323, up from 1,098 last week, and nearly double the number of auctions held two weeks ago. The preliminary clearance rate in the Victoria capital was 79.2 percent. Last week’s final clearance rate of 75.0 percent was the lowest of the year so far. One year ago, the clearance rate was 70.0 percent across 843 auctions.
Last Week’s Final Auction Results (Week Ending 14 May)
Don’t put too much faith in Sydney’s preliminary result. Last week, the clearance rate fell about five points from Monday to Thursday after all results were reported. If the same holds true for next week, this week’s result will end up at around 75.5 percent.Sydney’s preliminary result. Last week, the clearance rate fell about five points from Monday to Thursday after all results were reported. If the same holds true for next week, this week’s result will end up at around 75.5 percent.
In fact, every other capital was also adjusted down by Thursday last week. Here are final auction results from last week, according to CoreLogic:
Source: CoreLogic
For the historical data of weekly auction clearance rates, click here.
Recent Price Movements
Home prices in Sydney and Melbourne have been trending down for the last few months. The median home price in Sydney has now fallen to late-February levels, having lost 0.52 percent over the past week. Melbourne prices fell a dramatic 1.18 percent since last week. At this pace, quarterly gains for the two cities will be wiped out within the next two weeks.
Both Brisbane and Adelaide home prices rose over the past week, 0.11 percent and 0.50 percent respectively. Perth fell 0.19 percent over the same period.
Here’s CoreLogic’s most recent data for all the capital cities:
Source: CoreLogic
Property Market Analysis
Though supply rose considerably over the past two weeks, plenty of buyers have been showing up to keep auction clearance rates elevated. Falling prices in Melbourne and Sydney indicate that vendors are happy to accept a little less money to lock in a sale before prices fall any further. It’s also likely that recent supply increases are spreading out buyers amongst more properties, meaning prices are not being bid up as high at each property.
It’s difficult to say whether seller expectations are softening primarily due to fear about falling prices in the future or in response to rising supply. Considering the price peaks in Melbourne and Sydney occurred in mid-April and have been falling rapidly ever since, I’m inclined to believe that a psychological shift has occurred, and many sellers represent the least optimistic segment of the market.
Brisbane and Adelaide appear to be the most resilient markets for now. This could be a result of investors looking for properties that they can afford. With tighter lending restrictions for investors now in force, it’s much tougher to gain finance at the elevated prices in our two largest cities.
The resilience of our smaller capitals might also simply be due to prices there already being more in line with the fundamentals of wage-price growth. If housing demand wanes, prices there won’t have as far to fall to meet the market.
What It Means For Investors
Reading some of yesterday’s hyped property market headlines, like the ones here and here, investors may be inclined to think the talk of slowing price growth is premature. But the numbers don’t lie. Prices in Sydney and Melbourne are falling.
Of course, the million-dollar questions are how far will they fall, and will they start rising again. With interest rates at historic lows, auction clearance rates in the 70s, and population growth strong, Sydney and Melbourne may very well have enough demand in the pipeline to support current prices. Assuming that’s true, we may see the price floor soon.
As I’ve said countless times before, home prices are ultimately in the hands of our regulators. It all comes down to the RBA, APRA, and policy-makers in Canberra.
The latest job numbers looked moderately encouraging. Unfortunately, though, wages haven’t even grown as fast as our weak inflation over the past year. That means most people are financially worse off than twelve months ago, which doesn’t bode well for the property bulls.
That said, the slow wage growth may indicate the RBA will be cutting rates yet again. Credit Suisse just forecast multiple rate cuts by the end of this year. That would be bullish for home prices, unless of course, APRA steps in to lock even more investors out of the market.
Scott Morrison just announced more powers for APRA to start regulating the shadow banking industry more tightly. That makes me think the back-room talks have been going something like this:
Philip Lowe: “I’m really hoping the Fed hikes rates, but if not, I’ll definitely need interest rates lower to try to fuel some wage growth. I’m really getting tired of all the whinging from first homebuyers in Sydney and Melbourne.”
Wayne Byre: “Hey, we’re trying to do our part over here at APRA, but all these smaller lenders are undercutting the Big Five on interest rates. I wouldn’t be cutting rates unless you plan to give us a little more control over the little guys.”
Scott Morrison: “We have no intention of crashing home prices on our watch. If we do, we’ll all be out of a job. Glenn Stevens created this mess, so it’s up to you boys to fix it. I’ll tell you what though, if more power and money is all you need, I can certainly help you out there.”
As it turns out, APRA may not need those extra powers just yet. S&P Global Ratings just downgraded the credit scores of more than 20 smaller lenders, warning of the risks of a property market downturn. Why were the big banks spared? The market knows our Government would step up to use your tax dollars to bail them out. They have become “too big to fail.”
Expect interest rates at Bank of Queensland, Bendigo & Adelaide Bank and AMP Bank to rise, among others. So much for a competitive advantage after that bank levy. It makes me wonder if ScoMo had been talking to his boys down at the rating agency.
There’s one thing we do know for sure. If home prices fall too far, or if they continue rising much more, a lot of people will be screwed. It stands to reason then that the three amigos – Philip, Wayne, and Scott – will be doing everything they can to try to flatten out home price growth.
If you’re looking to enter the market soon, educate yourself so you can pursue an investing strategy that gives you more ways of winning than just speculating on generic capital growth. Otherwise, fast forward ten years, and you may find yourself no better off than you are now.
What’s your read on the property market?
Take a moment to share your thoughts by leaving a comment below.
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I would love to know your thoughts on buying hotel rooms, particularly in Melbourne. 480 Collins Street Melbourne is a prime example
Hi Mark.
When buying a “hotel room” you’re essentially buying a furnished one bedroom or studio apartment that comes with a long-term commercial lease from a hotel operator. It’s cheaper and lower risk for the hotel operator to lease the unit from the investor and make a profit managing short-term stays.
You have the potential for upside generic capital growth, but you also carry the risk of capital loss if all apartments in the area go down in value. The benefits tend to be on the cash-flow side, with a long-term tenant (the hotel) that pays the outgoings. You have no operating costs. Your primary expense is interest, if you borrow.
You first need to decide whether you’re an income investor or a growth investor. Most people don’t hit income investor status until they’re sitting on seven figures of cash that they’re looking to convert to an income stream. If that’s not you, you’re still chasing growth.
Considering the cap rates tend to be around 5% on these deals, I’d say you could do better if you’re an income investor. Considering the oversupply of apartments in the pipeline in Melbourne and settlement risk on the horizon, I’d say you could also do better as a growth investor.
Hope that helps.
Jason
Hi Jason,
My partner has inherited a property with an old house in Bentleigh East and is considering either building two side by side town houses or getting plans, permits and drawings done then selling it to a developer. The profits will be split 3 ways and he would do all of the work. Our real estate agent has advised the latter, which is what i tend to think given the added risk involved. We would also like to move forward with more property investing, so i believe if we get the profits and get out then we can do more in a shorter time frame.
Would love to know your opinion :-)
Hi Jodee.
I think you’re on the right track. Don’t rule out just selling the property as is. As Steve says, we should aim to make the most money in the quickest time with the least risk and lowest aggravation. The least time, risk and aggravation is just selling the property as is, so the added profit of the other two scenarios needs to be worth it. Quantify your profit outcome on all three options and compare the added time, risk and aggravation, then make your decision.
Hope that helps.
Jason
Hi Jason
I’d like to know your thoughts of the Brisbane market generally. Potentially looking to purchase either Coopers Plains apartment or Rochedale town house. I expect the Coopers Plains apartment to have a much higher rental (at around 5.7%) while Rochedale has more momentum in capital growth (given the amount of new proposed infrastructures), with a rent level that would most likely cover the interest provided that the rate stays below 5%.
I understand that Australia, especially Sydney and Melbourne are facing corrections and potentially a market crash, do you think Brisbane also faces a big risk on pricing correction? My buyer agent has advised me that corrections are imminent, so if I was to invest now I should either look for locations either close to uni for rent, or with long-term development plans for capital gain.
Would love to hear some of your thoughts.
Thanks
Andy
Hi Andy.
The latest news on Brisbane apartments is that developers are finding it much harder to sell their stock and in some cases are selling at big discounts. Both Melbourne and Brisbane have an oversupply of apartments and with lending restrictions tightening, there’s likely to be less demand from investors unless prices fall significantly. Rents are also moving backwards, so your 5.7% yield may not hold up. I also think your 5% cap rate is ambitious given typically high strata management fees and other operating costs. All of that said, a negatively geared (or even neutral) asset in a market that is exposed to these risks doesn’t seem ideal.
As far as Brisbane as a whole, we may see some decrease in investor demand due to tighter lending restrictions, but prices there are much more in line with wages than Sydney and Melbourne. If we see a price correction in Sydney and Melbourne to the tune of say 10% or less, Brisbane would likely not be impacted significantly. If however Sydney and Melbourne prices crash, then the cause of that (perhaps higher bond yields overseas, job market woes, credit crunch, etc.) would become a nationwide problem and Brisbane prices would likely also fall.
If I was you, I’d be looking for deals with more land so you can manufacture growth in the future, and with inefficiencies so you can create positive cash flow. Investing some money in your education would also be wise as it could save you from some pain later.
Hope that helps.
Jason
Hi Jason,
I am a growth-investor assessing Sydney or Melbourne or Brisbane as potential markets to invest.
I wanted to get your thoughts on Brisbane first. If clearance rates are so low, would you think that Brisbane is a buyer’s market? Should I be looking at apartments or houses? I am interested in land and therefore a free standing house makes sense but I have do not have a strong enough understanding of the Brisbane market & the right neighbourhoods to look at, so would be great to get your thoughts on the situation in that market and if Brisbane does not make sense, which one from Sydney or Melbourne make sense?
Thanks in advance !
Mani
Hi Mani.
I’m not sure that I’d call Brisbane a buyer’s market just because clearance rates are lower there. It’s not the best market to judge based on auction activity alone because there is a much smaller percentage of homes sold at auction there compared to Sydney and Melbourne.
As far as the types of properties that tend to perform better than others over the long term, you might find this article helpful: https://www.propertyinvesting.com/choosing-the-right-investment-property/
All the best,
Jason
Hi Jason
Do you have any experience or thoughts on the granny flat strategy that is possible in some parts of NSW? For example, in the Hunter Valley, I have seen 3 bedroom houses for sale for about $250k, spend approx. $100 to build granny flat and rent out both to get two income streams. That strategy is not possible in VIC because of the granny flat laws here. I would be grateful to know your thoughts. My husband and I both work full time, we don’t have huge borrowing capacity as we have a mortgage on our own home. We have a young child, so my goal is to create an extra income stream and use that income stream to speed up paying down our mortgage. Thanks very much.
Hi Shirley.
NSW is a very friendly granny flat state. I’ve written about using granny flats to boost cash flow in this article: https://www.propertyinvesting.com/granny-flat/
In NSW, granny flats development approval is a rubber stamp in under 10 days as long as your block is over 450m2 and your granny flat is under 60m2. It’s small, but two bedrooms is doable in that space.
It’s primarily an income-boosting strategy, so if you have a growth focus, it may or may not be ideal. But just to bring in extra income to pay down the mortgage over the long-term sounds reasonable. Just be mindful of higher operating costs like paying for the water bill. If interest rates go up, that would also eat into your positive cash flow.
All the best.
Jason