Investors should not interpret softening clearance rates as meaning the market is awash with bargains.
A lot of significance is being attached to nationwide property sales clearance rates, as the autumn market reached its highest volume levels so far this year in the lead up to Easter. It is normal for more properties to be offered before Easter, but this year when clearance rates showed a considerable dive in some sectors of the market, the doomsayers came out of the woodwork.
Before investors jump to conclusions, they need to analyse what the clearance signals are really telling us. Clearance rates are an unreliable measure of the overall robustness of the property market. Rather, they measure only two things reliably on a week-by-week basis; the volume of transactions and the extent of buyer demand relative to volume. Just as importantly, they reveal the extent to which the real estate industry is willing to report results!
A clearance rate of 70% or higher indicates that demand is significantly in excess of supply; 60% to 70% indicates a relative balance; and under 55% indicates a supply in excess of demand. These predictors only hold true if they are observed on a continuing week-in, week-out basis over a month or more.
And this is quite different from predictable episodes where market activity will be compressed or even absent, thereby causing a surge or decline in the auction clearance rate. For instance, it is wholly predictable that in the week or two leading up to Easter and the coinciding school holiday period and Labour Day holiday, that volumes of auctions will increase.
Even though the clearance outcomes are beginning to signal some movement towards a more level buying and selling playing field, they are not yet conclusive. It will take a month or so before any definitive predictions can be made more accurately. Also, different sectors of the market are showing quite different performances.
For instance, Melbourne had a record 1400 auctions listed for the weekend before Easter and returned a surprisingly strong 65% to 67% clearance rate. Sydney, which has been running at about 63%, fell to about 52%, but certain sectors and price brackets showed strong results.
In Brisbane, the recorded clearance rate was 24%, which led to some alarmist statements about tumbling prices and over-inflated vendor expectations, a totally incorrect conclusion because the auction method is not the norm in Brisbane. Perth, which began to show price stabilisation by mid-2007, has continued that trend, while Adelaide and the ACT markets have shown prices remaining steady.
Undoubtedly, there are other factors influencing the latest results, in addition to seasonal influences; namely, some buyer hesitation brought about by rising interest rates and the emergence of tighter lending criteria, continuing low housing affordability, ongoing financial fallout from individual sharemarket losses and margin calls, and a degree of unrealistic vendor expectation in regard to selling prices.
I think what is actually slowing is the abnormally high capital growth that defined some markets last year. This is encouraging for several reasons, not a precursor to doom!
Remember, we rarely see auctions in the bulk of outer-urban fringe sales or in over-supplied, multi-unit development sectors. Why? Because auctions generally rely on demand exceeding supply, hence their popularity in prime, highly sought-after areas. But, where there is no scarcity value or in an over-supplied sector of the market, different sales techniques are a better option.
Higher volume does not equate to more quality assets becoming available at a lower price. In fact, it is selected, prime inner-urban sectors of the capital city markets that are continuing to hold their price levels because demand is continuing to outstrip limited supply.
Even in Sydney – where across-the-board results would appear to show the country’s lowest growth rates at around 5% for 2007 – the game hasn’t changed that much for investors seeking prime assets. Independent Sydney property adviser Peter Kelaher, a member of the Property Buyer’s Agents Association of Australia (PBAAA), says the clearance rate has eased from about 62% to about 53%. The luxury end of the market – $5 million plus – has “gone a bit soft”, but the demand for units and houses up to $3 million is very strong because of a lack of supply.
“The same is happening with units in the more sought-after precincts and priced between $400,000 and $1 million; and again, we are seeing demand outstripping supply,” Kelaher says.
In Brisbane, PBAAA member Meighan Hetherington says the Brisbane market does not have a strong auction culture, but where auctions are held, they are generally noted for pre-auction sales, making reported clearance rates a poor indicator of market activity. “There is no doubt that the Brisbane market is starting to soften and vendors are having to look at lowering their price expectations. This does not, however, indicate a drop in prices as much as the fact that growth rates have stabilised,” Hetherington says.
She says the $1 million-plus upper end of the market is still very strong, with demand outstripping supply in very selected areas. The main stock increase has been in the $400,000 to $750,000 range, where the majority of buyers are active. “There is a strong sentiment that prices will drop due to uncertain economic circumstances. I suggest, in Brisbane at least, that prices aren’t showing signs of dropping; instead, they just aren’t going to grow at the high rates we saw last year,” she says.
I cannot urge investors strongly enough to avoid interpreting lower clearance rates and moderating price growth as a signal that the market has become a “bargain bin”. Instead, it means buyers can take the time to carefully consider their purchases without losing sight of the key selection criteria, and with the view that there is likely to be more quality stock on the market. Investors have the time to do this as we will not see a new influx of stock on to the market until the first or second week in May.
This story first appeared in the Eureka Report.