The Australian property market is getting crazier by the week. As we get deeper into the winter months, there are fewer buyers and sellers, but prices are somehow still rising. It seems that homebuyers are so fatigued and afraid of missing out on yet another deal, that they are willing to pay whatever is necessary just to put their season of house searching behind them.
I've heard agents reporting a backlog of downsizers who sold their properties months ago and now need to find smaller homes to live in. They have plenty in the kitty, so they’re easily outbidding younger, first-time buyers. These younger buyers get frustrated by being outbid by the oldies, which provokes them to overbid and pay more than anyone else was willing to pay last month.
The shocking part is they’re taking on an enormous amount of debt just to be an owner rather than a renter – to get on the property ladder - with the assumption that real estate will always continue going up in value. After all, we're the lucky country.
The Latest Preliminary Auction Activity
The number of auctions this week was considerably lower than last week. With less supply, it takes less demand to drive prices higher.
Here are the latest results from CoreLogic for the Australian capital cities:
Both Melbourne and Sydney remain above 70 percent again this week, but when compared to last week’s preliminary results, only Melbourne seems to have seen a boost in demand. Sydney’s preliminary result was almost identical to last week’s, but the final result was much lower, which will likely be the case again this week.
Across the rest of the country, the market looked relatively bleak. Only Canberra and Tasmania managed to clear above 60 percent.
Last Week’s Final Auction Results
Melbourne and Canberra managed to achieve a success rate above 70 percent last week, but in Sydney the final clearance rate was nearly five percentage points lower than the initial count suggested, falling from 72.6 percent to 68.0 percent. That’s often the case in Sydney, where agents like to inflate the initial reading to hype the headlines early in the week and make it seem like the property market remains really strong there.
Here are all the final capital city results for last week:
< ">
source
As is the case almost weekly, the sub-regions closer to the central business district (CBD) or “downtown” of Sydney saw the greatest demand.
Here are the results for the Sydney and Melbourne sub-regions, plus a few key regional areas:
Recent Changes in House Prices
As the title suggests, the median house price in Sydney and Melbourne charged higher yet again this week. Over the past week alone, both cities saw a major surge, adding to the strength of the last few weeks. Over a seven day period, Sydney home prices rose 0.57 percent, and Melbourne went up a whopping 1.30 percent.
This is particularly noteworthy because the market seemed to have peaked in April. Between mid-April and June, prices began falling, and it looked as though the boom was over. But since those price peaks in April, Sydney and Melbourne home prices have made up their losses and are now up from their previous highs 1.09 percent and 2.43 percent respectively.
Adelaide seems to be showing some weakness. As you can see in the following chart, it’s the only capital city in the red for the quarter.
Market Summary
Melbourne is definitely looking hot. Supply is falling in both Sydney and Melbourne, but it’s the Victorian capital where buyers are bidding up properties most rapidly. Why Melbourne? Well, it’s likely because prices are not as high as in Sydney, so more people can still afford to buy.
This brings up an important point. We know from the laws of economics that demand will weaken as home prices continue to rise relative to incomes. Eventually, unless wages rise, demand will decrease to the point where prices stop rising, or worse, decline dramatically.
It's all about interest rates.
As I reported last week, investors have seen borrowing costs rise as ARPA, the banking regulator that supposedly keeps lenders from taking on too much risk, has forced banks to tighten up on investors. These higher investor borrowing costs will be hitting the Sydney market the hardest because homes there are most expensive and therefore harder to service.
Moving forward, interest rates will play the primary role in determining where the property market goes. The ultimate reason real estate is so expensive in Australia is the availability of cheap credit. Therefore, if interest rates fall, especially for owner-occupiers, more people will be able to afford these already very expensive homes and more demand will be pulled forward from the future.
I wouldn’t be surprised if owner-occupiers catch a break from the RBA in the coming months. Wage growth is very slow at the moment here in Australia, and as Keynesian central bankers tend to do, they will try to inflate our way out of this stagnant economy by cutting interest rates.
Building approvals ain't looking so good.
Those who are less bullish will be quick to point out the weak building approvals data that came out the week before last. Approvals for new homes declined for the second time in the three months, which is a sign of lower demand for new homes. This indicates that growth in house prices could be slowing.
Most of this decline is probably the result of fewer investors in the market, thanks to APRA’s latest moves. The following chart from financial planning giant AMP shows the relationship:
It seems to me that it’s now up to owner-occupiers to keep the housing boom alive. That’s an awfully tall order considering nearly half of homes purchased in the last few years in Australia have been by investors.
