Confidence Improves and Melbourne Auctions Surpass Reserves

Source: news.com.au

Once again, the weekend produced some healthy results. The clearance rate was 74 per cent for Melbourne auctions, based on over 700 auctions. Typically, most sales in Melbourne are conducted privately. The split is roughly 75/25 – 75 per cent of properties are private sales, while 25 per cent are sold via auction.

However, when confidence improves and results start surpassing their reserve, the number of vendors opting to sell via auction increases. This week, 56 per cent of results posted were private sales, while the rest were for sale by auction. There is no perceptible sign of the market weakening. If anything, the reverse seems to be occurring.

All Melbourne auctions I’m attending are managing to sell under the hammer, though it should be noted that I typically attend “above par” listings, which obviously attract a larger buying market. In some instances, those sales are exceeding their reserves by over 10 per cent. As we’ve seen previously in bullish auction markets, this cannot be sustained over the longer term.

There has been little change in the basic fundamentals of our marketplace – confidence is still waxing and waning. The latest Westpac-Melbourne Institute index dipped 7 per cent in May, to 97.6, below the critical 100 point benchmark. Also, news of job losses have been filtering in over the past few months, initially from Ford and Holden, and most recently Crown, which should reflect badly on unemployment data. 

The drop in the cash rate, which was passed on in full by most lenders last month, has provided buyers will a little more spending power. However, the 70 per cent plus clearance rate (with overall turnover exceeding 1000 properties most weeks and prices swinging past the reserve) is more to do with the effect public auctions have on buyer psychology than anything else. It produces a stimulant across the marketplace and all price ranges, so those who miss out stretch budgets to make sure they don’t lose out on the next listing, and vendors up expectation as they see neighbouring properties selling higher than comparable sales would suggest.

Furthermore, stock is dropping – particularity good stock. Once again, this is fairly typical of a rising market. After all, who wants to sell when the perception remains that a vendor can get more if they hold and wait for further gains? Especially as additional rate cuts have been widely predicted.

Considering the clear reality that the market shows no current sign of weakening, it’s somewhat of a surprise to find RP Data’s daily index for May posted a -4.4 per cent drop in unit prices, while at the same time there has been a 3.7 per cent rise in house prices for the same period. It should also be noted that the REIV – which arguably collects a greater proportion of Melbourne’s sale data – has posted a comparatively modest 1.4 per cent gain in house prices for May, which is far more reasonable as an overall percentage.

There has been plenty of criticism aimed at the daily index for its apparent mismatch with other market indicators, some of which I have mentioned previously in my weekly Property Observer column. It seems the general consensus of opinion revolves around lagging results, which are collected and shuffled into the index at a later date.  This would make sense in light of the strong gains that were posted in the first quarter, but it is not immediately evident on the ground.

Regardless, investors and homebuyers need to be extremely prudent when setting budgets and bidding on properties. It’s still possible to buy well; however, the possibility of overpaying on the back of a short-term auction rally is ever-prevalent.