Ongoing Supply Shortage Giving More Power to Vendors

Auction Results for week ending February 12, 2017.

Auction volume doubled this week across the combined capital cities to 1,564, up from last week’s total count of 881 auctions. It still wasn’t enough to meet buyer demand, as the preliminary clearance rate surged to 76.6 percent. Last week’s final tally fell a few points to 68.7 percent.

The City Stats

Sydney buyers were out in force, despite a record heat wave, as the preliminary clearance rate surged to 84.8 percent, on volume of 633 auctions. Last week’s final count showed 259 vendors achieving a success rate of 72.3 percent. This time last year, a clearance rate of 78.1 per cent was recorded across 513 auctions.

In Melbourne, the market was a little more subdued, with 542 homes presented at auction mustering a preliminary clearance rate of 75.4 percent. Last week, 261 auctions were held and 77.7 percent of them found a winning bidder. Over the same weekend last year, the clearance rate was 74.4 percent, on auction volume of 556.

The Canberra market has shown significant strength for a second week in a row. This week, a whopping 80.0 percent of 86 auctions cleared successfully, up from a respectable 71.2 percent last week.

Finally, Brisbane’s result is worth a mention. For the first time in 18 months, the Queensland capital has climbed into the 60s. Preliminary results show 65.7 percent of 129 auctions finding a buyer.

The Graph

The Preliminary Numbers

The Analysis

Auction volume is lifting as we approach autumn, but demand seems unwilling to cool off. Buyers from last spring who failed to secure homes prior to Christmas are frustrated, afraid of missing out, and are now lowering their standard. Anecdotal evidence from Sydney agents suggests that un-renovated properties farther from train stations are now selling at record high prices.

Keep an eye on Brisbane. Queensland has historically been the recipient of ripple effect growth as investors get priced out of Sydney and Melbourne and look north. Perhaps this week’s strength is a sign of things to come.

Financial Review reported on a 3-bedroom property in the Sydney suburb of Strathfield that sold for $2.3 million over the weekend. For the sake of comparison, here’s a similar property in my hometown of Memphis, Tennessee, on offer for about A$140,000. You’d need four times that amount in cash just to settle on the Sydney property, but hey, Memphis is no Sydney.

What’s the takeaway? As buyers show signs of desperation, vendors will sniff out their fear of missing out and start demanding even higher prices. As long as the herd believes the market is invincible, property values will continue to rise, so long as banks remain willing to lend.

What It Means For Investors

Speaking of banks’ willingness to lend, the IMF is once again meddling in Australia’s economic affairs. It warns that we still face some “significant risks and uncertainties” within our housing market and in relation to our dependency on China. They suggest that a lower RBA cash rate may still be required, but in order to offset further growth in home prices, APRA will need to tighten up on bank capital requirements and get tougher on lending standards.

It appears there may already be some back-room talks of such changes to come. Commonwealth Bank just suspended all further refinancing of investor loans. Bankwest, a CBA subsidiary, is also tightening up, no longer taking into account negative gearing tax benefits in new loan applications.

David Murray, the head of Australia’s financial system inquiry and the former CEO of Commonwealth Bank, recently said that he believes APRA’s 10 percent annual growth rate cap on investor loans is too generous and should be reduced. Watch this space.

Whatever the outcome, expect regulators and politicians to find ways to stoke the economic fire, while at the same trying to put a gentle damper on raging home prices. Given the disparity between property markets across the country, I wouldn’t be surprised to see targeted restrictions on investor loans in Sydney and Melbourne, such as lower LVR requirements and even stricter servicing calculations. If that plays out, Brisbane will begin to look even more attractive to investors.

As always: speculate at your own risk.

—

The results listed here are based on preliminary reporting by CoreLogic. The final results will be reported in next week’s post.

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.