House Inventory Risk Matrix

The market boom we have experienced over the last few years was never expected to go on forever. I have grouped suburbs by Statistical Area (Sa3) and based measurements using inventory analysis. The result is a matrix that plots the current level of inventory by Sa3 in months on one axis, then the 6 month percentage change in inventory on the other axis. The result is a risk matrix that helps quantify what stage of the housing market cycle we are currently in based on hard numbers.

The matrix is split onto 5 sections. For illustrative purposes I have used 6-months as a 'balanced' market level. However it could be argued this might be be 4 or 5 months given our limited supply levels.

1. Inventory levels above 6 months and falling. This is a tipping point for many markets as sellers start to adjust price expectations. The level of price falls will vary between markets, with some having to make larger corrections than others to see excess inventory levels start to clear and return to balanced conditions (e.g 6-months).
2. Inventory levels below 6 months and falling. This is where most have been for the last 24 months, placing significant upwards pressure on prices.
3. Inventory levels below 6 months and rising. As you can see on the matrix, this is where we are now for most markets (Sa3's). It is likely that many sellers will hold on to price expectations for the short-term. This may result in inventory levels continuing to build until the number of sellers starts to clearly outweigh the number of buyers.
4. Inventory levels above 6 months and rising. Days-on-market starts to rise significantly at this point, placing pressure on vendors. We start to see more and more distressed listings and expired listings as the market turns. Sellers adjust expectations and prices fall, adjusting until balance is brought back to the Force.
5. The balancing act. Buyers and sellers have equal power and prices flat-line for some time. This is where I expect a large proportion of Australian housing markets to sit for a few years until the world sorts itself out. I also believe this is more likely due to the current low levels of inventory and very low pipeline supply (building approvals) as well as limited rental stock.

The last 24 months has seen housing markets sit well below 6-months of inventory and falling.

As the matrix illustrates, most markets have moved into slow down. Inventory levels are building but are still low, keeping a limit on price reductions for the time being.

Markets that end up here are the ones that will need to adjust prices the most to clear excess inventory.

You can find an interactive version of the House Inventory Risk Matrix at www.suburbtrends.com. Free to join.

Kent Lardner

Founder Suburbtrends