April 21, 2015 by Dymphna 3 Comments

Extreme reality check

hot property

In every hot market, there are stacks of people saying it can’t possibly go higher… until it does. Time for a reality check.

Just when you thought the market couldn’t go any higher – and many people were telling you it was a physical impossibility – property came back from the Easter break with an extra spring it its step.

And auctions in Sydney and Melbourne were described as ‘wild’.

Auction clearance rates – the percentage of auctions successfully completed because sellers got a good price – are booming, holding up around historic highs.

Nationally, auction clearance rates are at 79%, driven by Sydney, where they’re a staggering 85%.

Auctions are more or less popular in different cities, but the trend if fairly clear across the country. Auctions are performing.

And that points to a market that’s hot. Demand appetites are strong and it’s a seller’s market. That’s going to drive price growth.

And you can see it in the stats. Auction clearance rates and price growth are pretty clearly correlated. This is the chart for Sydney.

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That seems to suggest that pace of price growth could even accelerate further from here, potentially taking us north of 20% pa.

That might sound extreme, but in some Sydney suburbs we’ve seen growth of 25-30% over the past year.

But surely it can’t go on. Surely this is a bubble begging for a bust. Surely Massive Price Correction – the fifth horseman of the apocalypse is in the stables now putting on his riding britches.

And it is true that the clamour coming from the property doomsayers is reaching a fever pitch.

But then again, we’ve heard it all before. In fact, I reckon I’ve heard it in one form or another in every year since the turn of the millennium.

And I’m not saying the market isn’t hot. It certainly is. In fact I’ve cooked a nice little pie for myself on the heat coming of the market right now, on decisions I made two to three years ago.

But the point is that a hot market is not necessarily a bubble market.

The first point I’d make is that we often talk about the boom in Australian property, but taking an Australia-wide view hides more than it reveals.

And the important thing to remember is that Sydney is driving the herd. Right now, it’s Sydney that’s home to the big growth numbers. It’s Sydney where a large pool of homes is churning quickly, giving Sydney greater influence over the national numbers. And it’s Sydney where auctions are going ballistic.

There’s strong growth in Melbourne too, but once you get past those two, most of the other capitals are middling to decent. Some even appear to be taking a breather.

So the idea that Australian property is booming isn’t really true. Some markets are hot, some are red hot. But others are not.

And you also hear about the over-representation of investors in the market. It’s irrational and greedy investors who are driving the madness.

(Don’t you love how we’re always the whipping boy for this stuff?)

But if you look at growth in investor finance, it hardly looks like a market getting out of control.

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Sure, if you look at the latest data, it tells you that investor finance is growing at twice the speed of owner-occupier finance.

But put it in some perspective. Both owner-occupier and investor finance growth are barely a third of their historical highs.

Looking at this chart, it’s very hard to tell a story of a champagne-fuelled orgy of housing hedonism.

And the investor story is also mostly about Sydney. But as I’ve written elsewhere, that’s partly about first home buyers skipping the PPR and going straight to investment.

Seems to me the kids are just making some smart choices. I’m not going to get too upset about it.

And if we’re talking Sydney, and also Melbourne, then we need to remember that we still haven’t fixed the housing shortage.

For the better part of a decade, supply has been running way behind demand. Populations have been growing strongly, thanks in large part to increased immigration, but housing construction has fallen further and further behind.

And it’s only in the last year or so that construction seems to be making any kind of meaningful response.

This has left us with a massive shortage.

ANZ have tried to put some numbers on it – by estimating an effective market balance in Sydney.

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On their measure, the market was broadly balanced until 2004. After that point, construction rates tanked (as workers were siphoned off to work in the mines), and immigration drove stronger housing demand.

That tipped the market into shortage, and it’s only been getting worse. Even with record high construction rates, we don’t start working off the imbalance until 2017, and it looks like a long road back.

And with shortages like this, massive price increases, even in the order of 20-30%, are not surprising.

Now, you might not like this reality, but this is the reality driving the market.

Arguments that the market has somehow become ‘disconnected from reality’ are rubbish.

Sure, we’re getting some extreme results in some markets. But extreme realities create extreme results.

Get over it.

What’s the most ‘wild’ result you’ve heard of recently?

Does it seem like there’s a shortage of housing to you?