The Big Short or a Tall Tale?

Date: 01/03/2016

Results for week ending February 28.

Property investors and holders of bank shares were a little vexed last week after a London-based economist and hedge fund manager compared our property market to the movie The Big Short, predicting Aussie home values will soon fall by as much as 30 to 50 percent.

If recent auction clearance rates are any indication, homebuyers certainly don’t appear to be spooked. Last week marked the fourth consecutive week that the combined capital city clearance rate climbed above 70 percent.

The Stats

Melbourne’s preliminary result rose to 75.0 percent, on volume of 1,327 auctions. Although the result is below the 77.1 percent of properties that sold the same weekend last year, vendor activity was up considerably from the previous week.

Sydney’s clearance rate fell to 73.3 percent, on stronger volume of 872 auctions. Sellers in the NSW capital remain less than keen to enter the market. On the same weekend last year, 1,223 auctions were held, a full 40 percent more than this year.

Adelaide also posted a strong preliminary result of 72.7 percent.

The Graph

The Numbers

	Sydney	Melbourne	Brisbane	Adelaide	Perth	Tasmania	Canberra
Clearance Rate	73.3%	75.0%	58.3%	72.7%	44.4%	60.0%	69.6%
Auctions	872	1,327	175	118	47	5	72

The Analysis

The jury is still out on what February’s demand will mean for the future of real estate prices. Melbourne certainly appears to be looking stronger than Sydney. However, March 19’s “Super Saturday” results should offer a clear tell.

Summer is historically a slow season for auctions, with listings peaking in May. The late summer surge in demand should embolden sellers; so expect volumes to continue to rise in the coming months. We’ll see if buyers can match their enthusiasm.

What It Means For Investors

Thanks to our government’s insistence on propping up home prices, unless something crazy happens overseas, or unless Labor gets its way, the Aussie ‘Big Short’ may end up being a tall tale.

That said, economic growth worldwide is clearly slowing down. The RBA met today and decided to leave the cash rate on hold for now. In light of global deflationary pressures, a cut will likely come later this year. The futures market is now predicting a fall to 1.75 percent by August, and a further reduction to 1.5 percent by this time next year.

That should mean lower borrowing costs for banks, but not necessarily lower rates for investors. Tighter bank capital requirements will likely prevent those savings from flowing through to the housing market.

If the RBA takes action to stimulate our waning economy, we should expect inflation and a weaker dollar. Investors may therefore benefit from factoring in an increase in the cost of living when planning future budgets.

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.