Prices are Rising Again in Sydney and Melbourne. Is This Property Boom 2.0?

Property Market Update for Week Ending 25 June 2017 

Key Property Market Highlights: 

• Auction clearances rates are soft for a fourth week in a row.
• Sydney and Melbourne home prices just bounced back.
• A few select suburbs seem to be propping up the whole city. 
• Maybe population growth ain’t all that. 

This Week’s Preliminary Auction Activity (Week Ending 25 June)

We’ve just chalked up a fourth week in a row without a combined capital city clearance rate above 70 percent. This week, 69.1 percent of 2,323 capital city auctions cleared successfully. With the results of nearly 500 auctions yet to be reported, expect the final reading on Thursday to fall nearer to last week’s result.

Speaking of, last week was the lowest result for the year to date, with only 66.7 percent of 2,444 auctions finding a winning bidder. Over the same weekend last year, the clearance rate was 66.4 percent on auction volume of 2,218.

Source: CoreLogic

In Sydney this week, vendors brought 918 homes to auction this week, down only slightly from last week’s auction volume of 927. This week’s preliminary clearance rate of 73.1 percent appears much stronger than last week’s 66.7 percent. Last year at this time, the city was host to 816 auctions with a clearance rate was 73.5 percent.       

Melbourne’s preliminary clearance rate narrowly beat out last week’s record low for the year. This week, initial reporting shows 71.9 percent of 1,050 auctions found a buyer. Last week, the clearance rate was 71.0 percent on auction volume of 1,129. Over the same weekend one year ago, 1,029 auctions were held and 67.3 percent were successful.

Brisbane seems to have had an unusually rough week and Perth likewise posted a preliminary clearance rate in the 30’s. Demand in Canberra and Adelaide, however, seems to be on par with our two largest capitals.

Last Week’s Final Auction Results (Week Ending 18 June)

After the slow-down for the Queen’s Birthday two weeks ago, sellers rushed back into the market last week. Auction volume doubled across the combined capital cities, but demand softened. Had Melbourne not carried most of the weight again, the nationwide clearance rate would have come in several points lower.  

Here are all the final capital city results for last week:

Source: CoreLogic

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

Recent Price Movements

It appears Sydney and Melbourne prices are back on the rise. Looking deeper into CoreLogic’s back series of data, you can see that Sydney has seen 17 straight days of growth, and Melbourne is on a 13-day run. Over those respective time periods, each city’s median house price has risen 2 percent and wiped out most of the losses since their early-to-mid-April peaks.

As you can see in the following chart from CoreLogic, prices are for the most part a little higher than they were three months ago, with Adelaide and Perth being the notable exceptions.

Source: CoreLogic

Looking at the monthly data below, it’s mostly in the house market where the strength is returning. Units and apartments are still lagging, especially in Melbourne, where a supply glut is forming.

In Perth’s struggling market, however, the opposite has been true. It’s units that have fared much better than houses. This may be due to investor interest from the east coast.

Source: CoreLogic

Property Market Analysis

As I reported last week, auction clearance rates have been trending down, but prices in Melbourne and Sydney are rising. Typically, you would expect prices to fall when fewer sellers are finding buyers at auction. So, what’s the story?

Following on from analyses in the last update, demand is strongest and supply is weakest in the higher-end, more expensive and desirable locations around the CBD. That would mean that a higher percentage of expensive properties are selling and a lower percentage of the more common but less expensive properties are finding buyers, which would lead to a lower city-wide clearance rate but a higher median house price. In simple terms, the expensive properties are skewing the result.

Anecdotally speaking, I’ve been mentoring one investor who just sold her apartment in one of these high demand areas of Sydney in the Northern Beaches. While her auction was unsuccessful on the day, within a week she had an offer from someone who was willing to pay about $50,000 above her true reserve. I think it’s fair to say buyers are still willing to pay top dollar, but are fatigued by past failures at auction and prefer to come in after the fact to avoid disappointment.

That said, I was surprised to see median house prices rise so much over the past week, given the surge in supply. It just highlights again that in some areas housing stock is more plentiful, and in other areas buyers are competing more aggressively for properties.

One important question to keep in mind is, who is buying these properties and how far are they stretching their cash flow and earning ability? The high-demand, short-supply areas would be the last to turn down in a correction, however, if interest rates rise, or if economic growth slows, no area will be immune.

Expect auction volume to be much lower next week as we progress deeper into winter. Fewer than 1500 auctions are scheduled for Sydney and Melbourne combined. If demand remains constant, auction clearance rates should rise.

What It Means For Investors

So, is this recent growth in Sydney and Melbourne the sign of a renewed bullish trend?

Citibank just released some analysis on how the supply of new homes stacks up against population growth. Here’s their chart:

Source: Citi via Business Insider

Property perma-bulls make a big deal about how undersupplied the housing industry currently is compared to population growth, and especially immigration. But as you can see in the chart above, the peak in population growth occurred back in 2009. For the better part of the last five years, population growth has been trending down while dwelling stock has been trending up. That would indicate more of a bearish outlook with supply outstripping demand.

Of course, population growth is not the only source of housing demand. Ultimately, demand at current home prices is dependent upon the supply of cheap credit. With APRA tightening up on banks and especially the investor market, it’s hard to find a fundamental reason for extreme optimism.

The greatest source of encouragement for investors holding real estate in capital cities should come from the fact that our housing industry has become “too big to fail.” Because it’s in our economy’s best interest for home prices to remain elevated, our regulators and politicians will use all powers necessary to provide support for home prices.

As long as worldwide economic seas remain calm, the powers that be should succeed at keeping this ship sailing for the foreseeable future. From my vantage point though, that looks a lot more like a flat market than housing growth that can outpace inflation.

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.