How to read the Australian property market (1/2)

THE previously booming Sydney and Melbourne residential property markets last month declined in value.

Perth property dropped as well, while the rest of the capital cities were flat.

Sydney and Melbourne property values are still well up on the last year, and even so far in 2017, but there is no doubt the market is cooling.

That’s great news in terms of housing affordability and also for the Reserve Bank which has, for some time, been wanting to take the heat out of the key property markets of Sydney and Melbourne.

Many first home buyers have complained that the property market is too expensive.

A soft landing, rather than a crash, in the housing boom, is the desired outcome.

But that’s the tricky bit. Making sure it is a controlled slowdown.

Some experts, particularly from overseas, are suggesting this is the start of a well overdue crash which will bring our housing bubble back to reality.

Other local experts say these dire predictions just don’t understand the nuances of the Sydney and Melbourne markets which are driven by strong immigration, a shortage of supply and intense investor interest.

Both sides have strong arguments so, to be frank, who really knows with any certainty what the future will hold.

There are certainly no current signs of a market crash but, as investment history shows us, things can change quickly.

So what are the key factors, the early warning signs, that the residential property market is sliding from a soft landing to a much harder crash in prices?

Remembering that each region or capital city is a very different market, there are basically three indicators you should be keeping an eye on.

Falling auction clearance rates

When prices are booming, auction clearance rates are high.

Auction clearance rates have been falling in Sydney and Melbourne.

It means buyers are outstripping sellers and snapping up properties quickly … the fundamental demand versus supply foundation of a property market.

At the height of the property boom, Sydney and Melbourne auction clearance rates were in the low to mid 80 percent mark. Over the last couple of months, as price growth has slowed, those clearance rates have eased back to the mid to high 70 percent.

That fall in clearance rates is nothing to be alarmed about because anywhere above 70 percent still reflects a solid market.

But if the auction clearance rate falls to the mid to low 60 per cent region, and there is an increase in private sales against auctions, then you need to be wary.

Clearance rates at that level reflect a falling market that is at risk of a hard, rather than soft, landing.

 

by David and Libby Koch, News Corp Australia Network

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