Increased Confidence Drives Melbourne Auctions, Though Quality Listings Drop

We’re slowly approaching the winter market, and in line with seasonal expectation, quality listings are reducing and state-wide median prices are softening. RP Data’s daily index shows a 1.2 per cent decline in capital city home values and SQM’s stock on market data indicated a -1.1 per cent fall over April.

It’s important to get some kind of contextual overview whenever statistics are cited, because although on the face of it, the index shows a slight softening city-wide, the reduction in quality listings in inner and middle ring suburbs (where most properties are auctioned) is directing competition to desirable homes. In some instances, this is pushing prices back towards their 2010 peak.

Results in the established sector are still strong, and I’d imagine any softening in the price data is more to do with a drop in available good listings rather than individual house prices themselves. 

The weekend produced a 71 per cent clearance rate, from a total of 932 properties when combining both auction and private sales. 

Year to date, we are ahead in total transactions: 27,370 properties have been recorded as sold compared to 26,061 for the same time last year.

I attended four auctions on Saturday – all of which sold under the hammer with 3 to 4 bidders competing at each.  Year to date, over $4 billion homes have been sold via auction (compared to $2.9 billion for the same time last year), a number which would include properties sold prior to and via a passed in negotiation, both of which count toward the weekly clearance rate.

Auctions obviously thrive in an atmosphere where confidence predominates. Most selling agents can inspire buyers to openly state their interest in front of a crowd of individuals on a Saturday morning.

If a couple of bidders are brave enough to commence the battle, others have their initial attraction to the property demonstrably fed by the competition and join in. Conversely, if no-one openly states an interest, the reverse can be the case, leaving potential buyers wondering ‘what’s wrong with the home?’

In a market where auctions predominate, the price multiplier effect, buoyed by the physiological stimulant this method of selling promotes, results in prices gaining much stronger traction that would be possible in most private sale campaigns – something that has been well-documented in various scientific studies.

And as we’ve seen in Australia – irrespective of lending rates which reached close to 9% in the lead up to the onset of the GFC – when such an attitude takes hold, it is remarkably difficult to break or deflate.

Australia-wide, home buyers make up roughly 46-47 per cent of the buying market, whilst investors hold a rough 44-45 per cent.  The average home loan is around $400,000 and the vast majority of buyers choose to pour these funds into the established market.  Therefore, it stands to reason that the strongest competition can be found in the pre-$600,000 price range.

Considering the levels of private debt, mostly leveraged against housing, and the long-term acceleration in the investment sector, which currently makes up around 44 per cent of Australia’s buying market, it’s clear prices are once again moving northwards as a number of social and economic factors collide. 

Increased confidence, availability of cheap credit (such as our current low interest rate environment,) and the continuation of a cultural illusion that forgoes any financial prudence are all contributing to the situation. Investors are pulling their finances out of savings accounts before their purchasing power is diminished completely, in an attempt to beat inflation and shore up future security in an environment where basic living costs are high and growing.

Due to this, it’s unlikely we’ll see much change to the current status quo in the weeks ahead.  The biggest challenge for homeowners as well as investors will be sourcing good stock, which I expect to reduce further.  In markets where prices are rising, vendors often choose to delay going to market in anticipation of a future higher price. 

I would caution buyers to keep a level head in what could turn out to be a rather frothy atmosphere.