Is it Time to Call the Top of the Market?

The combined capital cities auction clearance rate has fallen below 70 percent for the first time in nearly three months. After last weekend’s lacklustre result, Swiss investment bank UBS has warned its clients,

“We are ‘calling the top’… we see a moderation ahead amid record supply and poor housing affordability,”

but added,

“the lack of RBA rate hikes reduces the likelihood this evolves into a crash.”

So, is it time to call the top? Does one weekend of lower-than-usual auction clearance rates give cause for alarm?

Are the latest APRA restrictions on investors diminishing demand? Is homebuyer sentiment changing with all the recent talk of a bubble?

Before we dive into those questions, let’s look at the latest data from CoreLogic.

Auction Results for week ending April 23, 2017.

The final reporting for last week’s auctions is in. Vendors brought a total of 1,751 capital city dwellings to auction, with 69.8 percent finding a winning bidder. That’s down from a clearance rate of 73.9 percent last week, though the Easter holiday meant auction volume was low at 493 auctions. Over the same weekend last year, 1,565 homes were auctioned and the clearance rate was 69.7 percent.

The City Stats

Agents in Sydney reported auction volume of 596, with a clearance rate of 72.4 percent. That’s considerably lower than last week, when 77.0 percent of 279 auctions were successful, and the week before when the clearance rate was 77.7 percent. One year ago, Sydney vendors were having a similar level of success, at 77.4 percent.

In Melbourne, 828 homes were taken to auction and 75.2 percent of those found a winning bidder. Over the previous Easter weekend, 81.3 percent of 102 auctions were successful, and the week before 79.3 percent cleared successfully. This time last year, vendors auctioned 602 homes with a success rate of 71.5 percent.

The Graph 

The Preliminary Numbers

The Analysis

It’s not uncommon for auction clearance rates to decline after Easter heading into the winter months. As you can see in the following chart from CoreLogic, a mid-autumn decline has been the trend for the last few years, at least until the RBA slashed rates again last year.

In 2015, auction clearance rates steadily dropped from April until the end of the year. The same would have likely happened in 2016, as demand clearly began to taper off in April. But the RBA intervened, and cut the cash rate to 1.75 percent in May and again to 1.50 percent in August, which lowered borrowing costs and pulled demand forward from the future. As a result, auction clearance rates started trending back up.                                     

Whether it’s a seasonal response or indicative of a true market peak, house prices in our largest cities have begun to slip. According to CoreLogic’s latest daily home value index data, over the previous week, ending Sunday 23 April, the combined five capital cities fell 0.2 percent, Melbourne was down 0.1 percent, and Sydney and Brisbane both declined 0.4 percent.

In Sydney, it appears the top of the market may have actually been April 11^th. Since that date, house prices have declined 0.91 percent. That’s a dramatic slowdown in light of the 5 percent quarterly growth Sydney has been chalking up. 

In Melbourne, the market may have peaked one week later on April 18^th. Since that index high ten days ago, home values have fallen 0.62 percent.

What It Means For Investors

With auction clearance rates noticeably down and CoreLogic’s daily home value index showing a possible peak, UBS may be right. April 2017 may go down in history as the peak of Australia’s record-setting property boom.

But let’s not forget; clearance rates above 70 percent are historically consistent with rising house prices. Sydney and Melbourne’s clearance rates of 72.4 percent and 75.2 percent respectively are still strong results and indicate that demand remains robust.

A few weeks of falling prices are hardly enough to indicate a long-term trend. Before we can truly call this the top of the market, we’ll need to see clearance rates fall a little further and remain below 70 percent. With the cooling sentiment from investors, that may very well happen.

Scott Morrison just revealed in a pre-budget speech today that the number of foreign investment applications for residential housing has fallen dramatically, thanks to tougher lending restrictions. The Foreign Investment Review Board only expects about 15,000 applications this year, down from 40,000 last year. That’s a significant hit to investor demand, especially in the apartment markets of Sydney, Melbourne and Brisbane.

Anecdotally speaking, I recently heard from one salesperson for one of the largest builders in the country who was selling 100 homes per year to Chinese investors, but now can’t find finance for a single overseas buyer.

I’ve also personally found that even Aussies are starting to back out of their unit purchases. I spoke to an investor this week in Sydney who says he’s willing to lose his $5,000 security deposit on an off-the-plan apartment purchase rather than face the settlement risk of falling apartment prices over the next eight months. From my perspective, sentiment is clearly shifting.

Regardless of whether this is the top of the market or not, prices remain extremely high relative to wages. Investors who lack the sophistication to carry out thorough due diligence and do more than speculate on generic capital growth should either educate themselves or sit on the sidelines.

The likelihood of losses from negative gearing has never been greater. Even if this isn’t the top, we’re closer than we’ve ever been.

And remember, home prices don’t have to fall dramatically for you to lose money investing in real estate, especially if you see cash flow as irrelevant.

What do you think?

Are we now at the top of the market in Sydney and Melbourne or will home price growth pick back up later this year or next?                          

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The auction results listed here are based on final reporting by CoreLogic.

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

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.