Sydney’s red hot auction scene has cooled lately and this could be telling.
After three years of rising property prices - including 19% growth from the June quarter of 2014 to the June quarter of this year, as per the Australian Bureau of Statistics - a number of pundits are now saying that Sydney’s property boom is over.
The latest numbers tend to support the theory. For example, SQM Research reported just 1% price growth for Sydney houses in the month to September 22 (rolling figures), a lower rate than the quarterly rate to September 22 of 1.6%. Furthermore, three bedroom houses - which are generally among the most popular properties - actually dropped by 1% in asking price over the month, by SQM Research’s figures.
Action packed auctions
Sydney’s red hot auction scene has cooled lately and this could be telling. For many people reporting on property, auctions clearance rates have become a sort of litmus test for how the market is performing generally, and so as this rate of sale has fallen from a high of 89% in late April (as per the Domain Group) to below the 80% mark in recent weeks, commentators have been signalling reduced interest from buyers ahead of the typically busy spring selling season.
It’s worth keeping in mind however, that clearance rates aren’t a definitive measure of how the property market is performing. For example, results for the final weekend in August saw 517 sales on 649 auctions in Sydney for a 74% clearance rate, according to the Domain Group. And yet, the slower rate of sale did nothing to quell spending, with the weekend's median price still above $1m at $1.1m.
To put this price level into perspective, CoreLogic RP Data puts Sydney's median overall dwelling price at $773,000 on its monthly index, which goes beyond auctions and considers factors such as property characteristics, geographical location and recent sales data.
While it's true that weekly auction numbers can give us a sense of how many buyers are out and about in a given week, they tend to be limited by the volume of homes placed on the market and by which suburbs those homes are actually in. The law of supply and demand still applies, according to head of research for CoreLogic RP Data, Tim Lawless.
"The swing towards auctions as a method of sale [in Sydney] is probably more symptomatic of the strong selling conditions and high buyer demand which makes the competitive bidding environment of an auction very successful when conditions are so strong," says Lawless.
The impact of investors
Investors are often cited as the dominant buying group in Sydney, which might be because they're typically the last ones standing at any given auction. There’s also statistical evidence that investors have been particularly busy over the past two years, with investment loans typically making up 40-50% of all loans in New South Wales over that period, according to the Australian Financial Group (AFG). However, investment loans moderated from 49.8% in May to 41.6% in June, AFG said.
This drop probably shouldn't surprise anyone given that investors have also been impacted by tighter borrowing rules issued by the Australian Prudential Regulation Authority (APRA). For example, several lenders have removed mortgage discounts from investor loans and have scaled back on riskier products such as interest-only loans. In some instances, concessions for negative gearing have also been removed.
In light of the new lending rules, chief executive of Positive Real Estate, Sam Saggers says that Sydney has hit its peak and expects just modest capital growth levels for the time being.
"In my opinion things will slow down. The APPRA changes in investment lending has seen investors seek other areas [of investment] that are less risky and with better yields,” he says. “Within the owner-occupier market there are less people attending open homes. Once we would see 30 people in attendance now its around half this. From a value preposition it’s just too expensive right now. Overseas investors have brought a new level of wealth into Sydney and pushed new housing prices up.”
Playing catch-up
Founder of Destiny Financial Solutions, Margaret Lomas agrees and says that Sydney’s strong price rises came about because the market was catching up after a lull between 2003 and 2010. During this period, most other capital cities virtually doubled in value, she says.
"Having said that, Sydney [pricing] has certainly over shot the mark largely due to two things - investor sentiment and the fear of missing out,” says Lomas. "There have been none of the traditional growth factors which typically cause a market to suddenly boom - things like a sudden influx of residents, specific large infrastructure projects, new employers and industries in town to name a few.
"And so it has been buyer sentiment which has been completely responsible for this latest price rise frenzy, and it will be lack of buyer sentiment which turns the tide.”
Lomas says a number of factors are lining up for such a change, including that the median price is now significantly above what the average wage earner can afford and that interest rates are tipped to either hold or increase. (On September 1, the Reserve Bank decided to hold the official cash rate at 2% after last cutting it May).
"We will still see the last of the buyers rushing in before it’s too late but in my opinion these buyers are likely to see a 5 – 7 % plunge in their values within 12 to 18 months," says Lomas.
Spring optimism
Spring is usually one of the peak periods on the real estate calendar, as it’s a good time to present and sell homes. Sales listings are already up in Sydney though, jumping 18.5% over July, according to SQM Research, more than in any other capital. Vendors are clearly looking to make their move while there's still heat in the market. The question now is how long will the heat last?
Lawless says that while listings normally rise during spring it doesn’t mean the market will soften. He says that Sydney still has strong economic conditions, is seeing better job numbers, lower unemployment and good population growth.
"The big test is whether buyer demand will increase at the same pace as listing numbers," he says.
- Jean-Paul Pelosi