I write a weekly property market update for PropertyInvesting.com, and after the positive feedback I received on last week’s update, I’ll keep these coming on Steemit for the time being.
The Latest Preliminary Auction Activity
In Sydney and Melbourne, it’s common for homes to sell at auction. Sometimes hundreds of people will show up on auction day at the property to watch bidders battle it out to pay top dollar for their dream home.
If you’ve never experienced an Aussie property auction, it's quite a sight to behold. Check out just a few minutes of this video, where the opening bid started at $690,000, but thanks to the auctioneer’s persistence, ended up over $900,000.
In the following table, you’ll find the preliminary count of successful auctions from a property data collecting company called CoreLogic. It includes both the auction clearance rate, which is the percentage of all auctions in the city that found a winning bidder, and the total number of auctions.
Here are the latest preliminary results for the Australian capital cities:
These stats provide a weekly snapshot of both supply and demand in the housing market.
You can see from these latest preliminary results that both Melbourne and Sydney had a clearance rate in the low 70s, which tends to be a show of moderate strength and indicative of rising home prices.
That said, the Sydney agents tend to inflate their results for a show of optimism in the headlines. When the final numbers are reported later this week, I expect Sydney’s result to be in the high 60s.
Brisbane posted some unusually low results this week. It’s too early to say whether that’s a sign of things to come or a one-off bad week.
Last Week’s Final Auction Results
Last weekend was the first week back after the Queen’s Birthday long weekend. That meant supply was down, but as expected, sellers flooded back into the market last week. There were twice as many auctions as the previous week, but demand declined. Melbourne was the stand out performer and helped to lift the nationwide clearance rate average.
Here are all the final capital city results for last week:
Recent Changes in House Prices
Sydney and Melbourne home prices peaked in April and then took a breather for a month or so, but now it looks like prices are back on the rise.
As of Monday, Sydney had seen 17 straight days of growth, and Melbourne was on a 13-day run. Both cities rose 2 percent over those respective time periods and wiped out most of their recent losses.
As you can see in the following chart from CoreLogic, home prices are almost at the same level they were three months ago, just a little higher. Adelaide and Perth are the notable exceptions, having pulled back slightly.
Looking at CoreLogic’s monthly data, you can see that houses have performed better than units. You can see that units and apartments have moved backwards in Melbourne and Brisbane over the past year. In both cities, we have significant supply gluts emerging.
Interestingly, the opposite has been true for Perth, which has really struggled due to the end of the mining boom. There units have performed much better than houses. I think that’s in part because Sydney and Melbourne investors are looking for cheaper properties, and they perceive Perth to be at the bottom of a growth cycle.
Market Summary
I’ve been following auction clearance rates in Sydney and Melbourne for year, and while they are stronger than they were at this time last year, we’re seeing a noticeable trend down. This week was the fourth week in a row where the nationwide result was below 70 percent.
In Melbourne, last week was a record low, and this week was almost as bad as last week.
That said, there are still plenty of buyers out there willing to pay top dollar. One of my clients just sold her 2 bedroom Sydney apartment for $1 million. She would have been happy with $950,000. Actually, when we discussed selling three months ago, she would have been happy with $850,000.
I’m not sure what to make of the recent price rises in Sydney and Melbourne yet. They’ve bounced back strongly over the last two to three weeks, but it’s too early to tell if this is a renew bullish trend. I’m inclined to think not, as there are some major headwinds to deal with from some dark clouds on the horizon, which I’ll cover below.
Dark Cloud #1: Population growth ain’t all that.
Citibank released analysis this week comparing the current supply of new homes with trends in population growth. Here’s their chart:
Source: Citi via Business Insider
The housing market perma-bulls in Australia like to jump up and down about the massive undersupply of housing stock compared to the mass influx of people moving into Sydney and Melbourne. But Citi’s latest analysis doesn’t match up with that.
As indicated in the chart above, population growth peaked back in 2009, but has mostly been trending down since then. With supply set to outpace population growth, that looks more like a bearish indicator to me.
Dark Cloud #2: APRA is sticking it to investors.
Population growth isn’t the only source of demand for homes. As I wrote about here Aussie real estate is so expensive because of the supply of cheap credit over the past few years.
The Australian Prudential Regulation Authority (APRA) is the banking industry regulator in Australia. They are supposed to keep banks from taking on too much risk, but we all know that’s a joke. They are already leveraged beyond any hope of survival in a SHTF scenario.
The true purpose of APRA is to collude with the Reserve Bank of Australia (RBA) to slow down or speed up the supply of credit. Because the RBA has been suppressing interest rates by printing money to buy short term bonds, property investors have been encouraged to mindlessly speculate on never ending capital growth in the real estate market.
The result has been a massively inflated housing market. Young people trying to buy a home today in Sydney and Melbourne are pretty much screwed. This is putting pressure on politicians to do something. The problem is, they all own real estate and don’t want prices to fall.
At the same time, the Australian economy is only growing at 2 percent per year and the Keynesian economists can hardly sleep at night. They really need to cut rates again to further manipulate the economy and inject some monetary heroin into the system, but doing so would drive property prices even higher, and further piss off those who can’t buy a home today.
That’s where APRA comes in. They have recently been tightening up on banks, making them hold more capital and lend less money. They obviously don’t want to make it harder on first homebuyers or the general home owning public, so they’ve directed their macroprudential measures at investors. The result is higher borrowing costs to investors.
Nearly half of all demand in the housing market has come from investors over the past few years. As APRA continues to cut into this market, it’s hard to remain too bullish on home prices growth.
Dark Cloud #3: The Aussie lending market is on shaky ground.
People can’t afford homes in Australia at current prices unless interest rates remain low. Since 2012, Australian households have taken on an enormous amount of debt, which now amounts to 189% of disposable incomes.
If interest rates start to rise, Australian households will feel it immediately because all mortgages here are set at a variable rate. There is no 30 year fixed rate mortgage here.
Most of the money Australian banks lend out to homebuyers comes from the overseas lending market. They sell bonds to investors in the USA and Europe and then lend that money back out to Aussies here in the form of mortgages.
If bond prices fall and yields rise, these banks will be forced to pay higher interest rates on their debts. Who do you think will pay for that? It certainly won’t be shareholders. Mortgage rates will rise.
Ratings agencies have already started cutting the credit ratings of most of Australia’s banks because of risks in the housing market. That alone makes it more expensive for them to borrow, leading to higher mortgage rates.
When things get ugly, which they always do given enough time, then interest rates will rise, and home prices will fall.
