Put Another Log On The Fire
Results for week ending 3 May
Auction Clearance rates were again red hot with the national rate of 79% the third highest on record. Sydney, Melbourne and Canberra all had results above 80%.
The Stat
Auction clearance rates report the number of properties sold compared to the number of properties offered up for auction. A figure of 80% and above indicates a strong performance. The real estate industry aims for 70%.
The Graph
The Numbers
Auction Clearance Rates | ||
| Week Ending 3/05/15 | Clearance Rate | Auctions |
Sydney | 87.3% | 679 |
Melbourne | 81.3% | 963 |
Brisbane | 49.5% | 107 |
Adelaide | 72.5% | 91 |
Perth | 27.8% | 18 |
Tasmania | 40.0% | 15 |
Canberra | 81.5% | 27 |
Source – Corelogic RPData | ||
The Analysis
As we can see the numbers remain hot for much of the country. The prolonged performance of the market is fueling home prices. Given the continued solid auction numbers there is some foundation to what is occurring.
However, this weekend an inner Melbourne property sold for $1.7 million above reserve! The mind does boggle and one does have to wonder where market fundamentals end and a buyer’s elevated psychology begins.
In terms of Sydney, median prices have increased by 40% in the last 3 years alone. At least one economist, Domain Group’s senior economist Andrew Wilson, is projecting their median home price to reach $1 million by the end of the year. Dr. Wilson wasn’t as concerned as some at the increasing prices pointing out that Sydney was an improving city and that prices were just “catching up with the inner areas of other global cities.” It’s still a remarkable climb in such a short period.
What It Means For Investors
There is no doubt that the market is hot but what should we make of it? Jason Staggers has written on Doom, Boom or Gloom. This is an excellent reflection on Steve McKnight’s most recent market update.
I will only add that NAB’s recent Quarterly Residential Property Survey found that of all the major cities only Sydneysiders saw property prices as the biggest impediment to market entry. While most cities still found price a major factor the rest of the country saw economic factors underpinning employment as their biggest hurdle. I think this characterises where things are at with the current market. I think it also gives insight into the headaches the reserve bank will have when making a decision on cash rates too. In this climate a further downward shift in rates will certainly put another log on the property fire.
Comments
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Hi Andrew,
“I think it also gives insight into the headaches the reserve bank will have when making a decision on cash rates too. In this climate a further downward shift in rates will certainly put another log on the property fire.”
Something I struggle with is this notion the RBA has that it should protect us all from the “high prices of Real Estate”. Umm, why??
Isn’t this the property market just doing what it does?
Doesn’t a lift in property sales “lead the country out of recession”?
Why should they refuse to drop rates (thus keeping the AU$ way too high for the good of the rest of the economy)?
I haven’t seen too much common sense from the RBA over the last ten years (starting with late 2007 when they starting lifting our Interest Rates while the rest of the world were madly cutting theirs !!!)
Maybe we should have a “double Dissolution” of the RBA (get some new blood – and brains – into the joint)?
Or is it just me that thinks this way? :p
Benny
Excessively low interest rates over extended periods fuel assett bubbles (put another log on the fire).
Extended low interest rates in the US under Greenspan (along with loose lending practices) led to the GFC. When holding cash means you lose money compared to inflation people will put their cash into properties, shares and other assets and leverage to boost returns, taking on more risk in order to get decent returns. What I am seeing with low rates in Sydney is renters moving into ownership as they can afford to at these low rates where the interest cost is only marginally more than the cost of renting, that is until purchase costs get so high that it rebalances towards rents being cheaper. With the low rates “investors” are also buying property because there is no point holding cash and going backwards, but the renters are drying up so there are increasing vacancies. This puts downward pressure on rents at a time where most investors are already negatively geared.
When you get no rent you are losing even more money until it becomes too painful to hold. At some point investors start jumping off the merrygoround which should assist in a property price correction. RBA are doing ok when keeping interest higher. Throwing fuel on a fire is fun to watch, but if you are warming your hands over it at the time unless you pull away quick enough you can get burnt.
Hi King-co,
The property market typically goes into a form of hibernation through the winter so it will be interesting to see if that will put a circuit breaker through the market. Some interesting observations re: Sydney though. Thanks for sharing them.
Andrew
Hi Benny,
Here’s a link outlining the objectives for the RBA http://www.rba.gov.au/monetary-policy/about.html#the_monetary_policy_framework While the RBA has various objectives “the principal medium-term objective of monetary policy is to control inflation”. The target is for 2-3%, and up to the March quarter we were sitting on a rate of 1.3%. The RBA has a lot of room to move to meet that objective.
The problem with adjusting interests rates though is that it’s a pretty blunt tool ie. it has broader consequences when trying to manipulate its stated targets. Glen Stevens has openly aired concerns about monetary policy’s impact on the housing market, particularly in Sydney. Stevens is working hard to mitigate risks within that market so the RBA can lower rates to meet their objectives without too much collateral damage. Here’s an interesting article looking at some of the problems we face http://www.afr.com/business/banking-and-finance/financial-services/imf-to-probe-australias-record-property-and-debt-levels-20150501-1mxjmi
I suppose these complications just go to show why we need to be smart as investors. Information and education is vital.
Andrew Stow
Hi Andrew,
Really good points, mate – and thanks for those links too!!
You have summed up much of what I was trying to say – here:-
“Stevens is working hard to mitigate risks within the housing market so the RBA can lower rates to meet their objectives without too much collateral damage.”
And here:-
“The principal medium-term objective of monetary policy is to control inflation”. The target is for 2-3%, and up to the March quarter we were sitting on a rate of 1.3%. The RBA has a lot of room to move to meet that objective.
Precisely ^^^
They have lots of room to drop rates to boost the economy, but Sydney housing is providing a Red light – so, the rest of the economy can suffer until Sydney housing cools??? Sheesh !!! *rolleyes*
And a big tick for this comment, Andrew :-
I suppose these complications just go to show why we need to be smart as investors. Information and education is vital.
So true !!
Benny