Looking through the Mist...why you're not getting a clear view of the property market

After a booming 4 years of property sales and property price growth across the Sydney market, clearance rates consistently above 80% and seemingly unrestrained lending, as the middle of March 2018 approaches and clearance rates (as reported) are hovering around 66%, if you believed what you read, we are heading for market crash.

Firstly, a few myths need to be dispelled about Auction Clearance rates data and the core markets of Sydney. The East, City fringe, Inner West, Lower and Upper North Shore, for example, we describe as the core markets – because they are more established and in the inner ring of the CBD. The Auction clearance rates published weekly are for the total market, but if you look more closely, the core markets still have clearance rates between 75-90%. Markets outside of the core show clearance rates on average less then 60%.

What’s misleading across the board about clearance rates is what qualifies to be included as sold at auction. If we take a look at the clearance rates from March 3rd, 2018 of the 1,135 results tabulated, the clearance rate was actually 62% (reportedly 699 sales). The truth was only 430 were sold under the hammer (37.9%), 262 sold prior and 7 sold after auction.

Sold prior to auction should never be included in the clearance rate data in our view, here’s why. Yes the property was sold during an auction campaign, but it misleads consumers when it’s included in the clearance rate data. The auction system and the sales pitch is predicated on it being the marketing platform that will provide the best price for the vendor by creating competitive tension with multiple parties competing for the property in a public forum. For there to be competitive tension there needs to be two or more buyers. If there are, then the Auction system should deliver for the vendor. If there isn’t, then the property will usually pass in (like 291 properties did on March 3rd 2018, or it will be withdrawn like 145 properties were – this usually means there wasn’t a buyer at the level the vendor would sell) so with 262 properties sold prior this speaks to buyer depth (not enough to compete at auction). This isn’t always the case but it is usually the case. The agent will work with the strongest buyer because at auction they risk getting less. If the strongest buyer is $100,000 above the next buyer, an agent will want to shut it down because it’s in the best interests of the vendor, but that’s not an auction and therefore shouldn’t be included in the clearance rate number. So does this mean with a true clearance rate of 37.9% we have a market on the brink of a crash? NO what is really going on is that generally there are less buyers in the market and therefore less competition on a property, and these results don’t take into account off market transactions or private treaty sales (which still comprise 75% of all sales weekly) and it’s important to remember, a closer look at the data reveals, that in the core markets where auction is the preferred marketing method, 75%+ of all properties are selling, albeit with fewer buyers on properties.

The segment that has been hit the hardest at this stage is the unit market across the total market and in the core markets for example we are seeing 1 bedroom units generally off 5-10% of their 1st half 2017 highs. 1 beds without parking aren’t finding buyers generally, but with parking, most are transacting (risk adjusted quality assets are getting the buyers).

Whats Changed?

First some background. The Australian residential market is worth over $7 trillion. Over the last ten years – according to the Real Estate Institute of Australia; the median unit price in Sydney has increased roughly 85% and the median house price more than 110%. The result is most homeowners are “in the money”. Importantly, strict Australian banking rules mean that borrowers are liable to repay that loan, they hand the keys back – USA GFC style. However, the requirement that the major banks make the lending criteria more arduous, and an increase their NTA has been implemented, and as a result, makes Australia safer than ever and more appealing for inflows of investment capital. But what we are seeing now is some buyer fatigue hung over from last year, less buyers in the market, but importantly the impact that APRA has had on the investor market and also the home buyer, has created the most impact.

The biggest impact to the current market

The APRA measures, which began in May 2015 and have been tightening since, have meant that debt is harder to get access to in the amounts previously easily available. Some of the changes introduced include;

? No more interest only investment loans

? No more 100% finance

? Home owners have had loan to earnings reduced from 8 to 7 times earnings (12.5%)

? Deposit requirements have increased – generally

? Interest rates to investors are higher than home buyers

? Changes to serviceability requirements and how the bank views income

How are these changes impacting the market?

As a result in the changes in Auction clearance rates and a reported decline in residential prices (10-20%), the Media have fuelled the fear of a housing bubble ready to burst.

Borrowers have consequently become overly cautious because of this media coverage coupled with the process of getting a home loan is more rigorous than it has ever been, despite the fact the cash rate is still at an all-time low and bank lending rates are still sub 4% for many borrowers. What borrowers need to know is that banks can’t put rates up quickly anyway because most of the country’s borrowers are under the former bank lending standards, regardless of the increase in equity the growth of the last decade has delivered them. Because there are such high levels of household debt (120% of GDP), APRA introduced cooling measures to underpin the property market and these measures are working to reduce this and provide a sustainable market in the long term. The housing market has slowed, as have development and development approvals, this has been because of the new hurdles in place to secure finance as well as the development finance hurdle of 100% pre-sales to secure construction finance. But with the challenges for investors and home buyers to get loans coupled with a more conservative view of the market, developers are less likely to get 100% pre-sales and therefore won’t get their projects off the ground resulting in under supply over time.

How population growth is underpinning the property market and property values long-term

The ageing population will drive and shape the Australian economy and our market dynamics which will impact all property sectors.

Our population growth and the persistent planning issues, will result in property prices becoming even more of an issue due to lack of supply – long term we don’t have an over supply problem. For over a decade we have had an under supply of housing and the current pullback in supply is actually a long way from being a Surplus Report to NSW Premier by Glenn Stevens on Housing affordability

An extract from the report published May 22nd 2017 (link above)

"First, the size of the task is very large. The GSC growth targets envisage, roughly speaking, about 700,000 new dwellings in the Sydney region for an additional 1 ? million residents, over twenty years. There are about 1.7 million dwellings in the Sydney region now as a result of accumulated investment over the period since 1788. The plan is to add, in 20 years, 40 per cent in net terms to that stock. Such an outcome would require current rates of commencements, which are at a high, to be maintained, or exceeded, on average, over two decades, in a notoriously cyclical industry – and without costs escalating significantly. This is, to say the least, an ambitious goal."

First world countries have a fast-growing Ageing population. Our current population is 24 million, with 14% above the age of 65 and require tax payer financial support. In 50 years’ time the population is forecasted to be 52 million and 25% will be over 65 and require tax payer funded financial support.

Australia needs more skilled immigration to replace the ageing workforce as well as skilled workers to help support this population in retirement. Because of the ageing population, the government is planning to significantly grow the immigration intake for skilled workers contributing to the tax payer pool. By digitising the immigration process, it will mean more efficiency in the processing enabling larger inflows of skilled labour to support a growing and ageing economy

The commentary needs to change. The short term focus and the happenings in the market now are not consistent with macro fundamentals and the changes to our population which are well underway. The perception of the current market at the face merely reflect the cooling measures introduced by APRA which are having the desired effect and will continue to.

Rates won’t rise in a hurry because CPI and wages growth won’t support or justify an increase, with such a big exposure by the big four banks to residential mortgages, any dramatic increase in mortgage delinquencies could have dire consequences to banks balance sheets and a knock-on effect to the broader market. Property is too valuable to the Australian economy and the government, regulators and banks will do whatever they can to protect it and the rivers of gold it provides them.

As in any market – sellers, transitioning or buyers’ market, purchasers need to be asset focussed and look to manage the downside risk. Being in our 20th year, we have been through the cycles many times and with each one gathered more experience that we hope will benefit our clients. The disease is shortism, the cure is longtermism – see through the mist of misdirection and fear mongering.

Written by

Stuart Jones

[email protected]

www.roseandjones.com.au

Sources: MP Funds Management, REIA, ABS, Glenn Stevens AC