While Auctions Remain Strong in Melbourne, Buyers Should be Cautious

Once again, Melbourne is producing healthy auction results. The clearance rate to date is 70 per cent (up from 68 per cent in April) and the latest REIV house price index revealed a 1.4 per cent increase for May.  In line with trend, the clearance rate recorded this weekend was also 70 per cent.

Year-to-date summary – REIV:

According to the REIV, this is the eighth consecutive month of house price increases. Unit prices also showed a moderate boost – they were up 0.9 per cent for the month – which is the third consecutive monthly rise.

Not surprisingly, the biggest gains have been recorded in the inner and middle regions of the city – principally, the ‘auction dominated’ terrains – while the outer suburbs remain stable.

When confidence improves and auctions start to openly surpass their reserves, the number of vendors opting to sell using this method increases. As reported by the REIV, by the end of June approximately 3,175 auctions will have been held. Only once in the past decade (2010) have there been more auctions in June, and in the inner and middle ring suburbs there is no perceptible sign of the market weakening; if anything, the reverse is occurring.

The majority of auctions I watch are selling under the hammer. However, it should be noted that I filter the auctions I attend, concentrating primarily on listings that attract a wider buying market due to location and type. In some instances, those sales are exceeding reserves by as much as 10 per cent.  As we’ve seen previously, this cannot be sustained over the longer term.

It’s not quite the rampant atmosphere we experienced in 2007 when the lending frenzy leading up to the GFC was pushing excessive amounts of easy credit into the market. Prices are still well below their peak and results are patchy.

However, while the aggregated data shows only moderate gains, in areas where auction sales predominate (such as Bentleigh, Hawthorn and Glen Iris), a number of economic and social factors have combined to push it well and truly into a seller’s domain. 

This robust turnaround has produced confusion in recent media articles.  Confidence is still waxing and waning, with the Westpac-Melbourne Institute Index down 7 per cent in May to 97.6 – below the critical 100 point benchmark. Although a bounce was welcomed back in June, we’re still on a rough equal split between those who think the cup is half full or half empty. 

Also, news of job losses have been filtering in over the past few months, initially from Ford and Holden and most recently Target, not to mention some of Victoria’s fruit growing regions following cutbacks by SPC Ardmona.  All of this will produce a drag on Victoria’s employment data over the months to come. Unemployment currently sits at around 5.6 per cent (in trend terms). 

The recent drop in the cash rate provided buyers with a little more spending power; however, the 70 per cent year to date clearance rate can be attributed, in certain measure, to the effect public auctions have on buyer confidence.

I have written about the chain reaction this method of sale has on the market as a whole previously. The last time we had an auction rally was back in 2010, during which clearance rates were in the 80s.  Three years later I’m still coming across buyers who bought in peak conditions under competition and cannot sell for purchase price.

In other words, regardless of low interest rates and improved affordability, their property sits in negative equity. New data from Melbourne Institute’s federally-funded Household, Income and Labour Dynamics in Australia survey backs this up. It shows one in every 40 families with a mortgage in 2010 owed the bank more than what their home was worth. Senior economist Shane Garrett commented that negative equity rates were likely to be the same now as in 2010.

Is it ever okay to say it’s not a good time to buy?  Quite clearly, “yes!”

Bidding against competitors has physiological effects that have been well-documented. When confidence improves, this method of sale does result in higher prices, prices that would be extremely difficult to negotiate in a private sale scenario when the leading buyer would have no undisputed evidence that a competitor is willing to pay more.

Not unlike sports gambling, a well-staged auction actively encourages buyers to lose a sense of considered rationality. A trained auctioneer pushes the players to stretch their budgets past their pre-established limit. When combined with a strong desire to win at all costs, this can result in a potentially dangerous set of circumstances.  

Furthermore, in some of these key regions stock is dropping – particularity good stock – which 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 are still widely anticipated?

Considering the clear reality that the market shows no current sign of weakening, it’s something of a surprise to find RP Data’s daily index for May posted a -4.4 per cent drop in Melbourne unit prices whilst at the same time, there has been a 3.7 per cent rise in house prices for the same period. Overall, RP Data’s recorded monthly drop for Melbourne is -2.1 per cent, and in light of the information above, it should be questioned.

It’s not the only surprise to be found in RP Data’s monthly index. Take Canberra for example. According to RP Data, dwellings were up 3.8 per cent for the March quarter – yet just 2 months into the second quarter they have dropped by – 1.5 per cent.

Hobart’s unit market has all but crashed with prices – 8.5 per cent – whilst on the other hand, the housing market has posted a rather healthy 3.4 per cent rise.

Overall, the combined capital city index declined 1.2 per cent over May, after falling by 0.5 per cent in April.  In other words, we’re on a downward slope. Rismark’s CEO Ben Skilbeck commented that it could be “driven by vendors reducing their initial expectations in order to meet buyer offers.”

To come to this conclusion, you need to do more than simply theorise on the results as they’re set out on a spreadsheet. 

I’ve had the advantage of negotiating with vendors over the past 6 months, and can quite confidently confirm there has been no such decline in expectation – unless the property is compromised by location or interior design, most are enjoying a relative windfall in relation to last year’s expectations. And according to SQM’s weekly “vendor sentiment index,” asking prices are, if anything, trending upwards, which once again suggests there is demand in the market currently meeting expectation. 

I’ve cautioned previously about this short-term approach to statistics and I’m by no means alone in doing so. There has been plenty of criticism aimed at RP Data’s daily index for its apparent mismatch with other market indicators.

It seems the general consensus 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 was not immediately evident on the ground – and it should be remembered that the daily index is not seasonally adjusted, so data can be noisy.

RP Data have recently claimed they “ring up agents” to get information on private sales, which would be a mammoth task considering most agents are highly unlikely to prioritise the reporting of private treaty sales information as soon as a contract is signed – if at all.  And yet this is what the accuracy of daily index relies upon – prompt agent reporting.  Without it, the results lag until the official settled sales data filters through from the government (some 3 months plus later.)

With this in mind, the degree of concentration given over to the index should be questioned.  Furthermore, until missing results have been collected, correlated and adjusted for seasonal distortions, it’s clearly not a reliable or timely indicator. 

However, it’s fair to suggest the underlying fundamentals of the market recovery to date are weak at best. Credit growth has been hobbling along (in part due to the trend to pay down debt) and although ABS April data shows the highest monthly uptake of home loans since November 2009, Westpac summed it up best when they suggested the gains were “underwhelming,” commenting on the 0.7 per cent decline (excluding refinancing) for owner-occupiers; albeit year to date, they are up 11.4 per cent (not a great result in light of the current low interest rate environment.)

Data from the Department of Sustainability & Environment shows more mortgages in Victoria are being discharged than lodged, and turnover – although moderately up with 168,029 transfers taking place in the year to May 2013, up from the record low 167,200 transfers in the year to March 2013 –remains 13 per cent below the decade average.

So what’s the fuel pushing both clearance rates and prices past reserve? Well – in a word (or two) – primarily speculation, and a rush to invest anywhere that provides a greater return, rather than stashing cash in a long-term deposit account.

It’s clear that investors remain the most active demographic. The value of investor finance commitments was up by 1% in April, and 18% over the year – the highest level since January 2008, which would have a beneficial rollover effect for those relying on sales to upgrade (which it should be noted, increases spending power without the need to increase borrowing levels).

With this in mind, you have to wonder how long the current recovery in Melbourne (and for that matter some of our other states) will last, especially as questions of oversupply still loom on the horizon. Or perhaps Steve Keen best summed it up when he termed it a “sucker’s rally?”

All in all let’s face it, as it stands, the market is imbalanced, due to a proportionally lower percentage of first home buyers, a desperate bid from investors to advantage from short-term gains, and a construction industry calling out – somewhat desperately – for another rate cut.