The fall in Sydney and Melbourne auction clearance rates over the weekend is a gift for writers of scary headlines. Before they get too excited, keeping some perspective paints it as part of a return to something more like normal – not heralding the constantly-predicted “crash”.
The headline-grabber was preliminary Saturday auction clearances of 58 per cent for Sydney and 65 per cent for Melbourne. AMP Capital’s chief economist Shane Oliver reckons that once late reports are allowed for, those figures reduce to about 49 per cent for Sydney and 61 per cent for Melbourne.
Mr Oliver’s rough calculation is that Sydney’s April auction clearance average was 53 per cent – the lowest April result since 2008 – while Melbourne’s 61 cent average would be the lowest April since 2012.
For Sydneysiders used to the blood sport of attending their neighbourhood auctions, “HALF SATURDAY’S AUCTIONS FAILED!” might shock but there’s nothing unhealthy about an auction clearance rate around 50 per cent. When the rate soared during the worst of the price boom, it was being driven by an unhealthy fear of missing out. Without FOMO, the Sydney housing market should behave more rationally.
It’s not hard to find whatever forecast you want to find for housing prices, ranging from the perma-bears’ “we’ll all be rooned” to spruikers claiming prices always go up. Somewhere in between, a reasonable 10 per cent correction from the height of the Sydney boom would go part of the way to bringing Sydney back in line with an old guide to market heat – the Sydney/Brisbane house price ratio.
That ratio swings with the different markets’ booms and corrections but has averaged about 1.7 over the past four decades. It was 2.16 at the June quarter peak when the median Sydney house sold for $1.178 million and the Brisbane median was $546,043.
As Brisbane-based property analyst Pete Wargent has been telling people, that ratio has to come down by one means or another “and probably both”.
“Both” is what has been happening. On the Domain March quarter figures, the median Sydney house price had cooled a touch to $1.150 million while the Brisbane equivalent was $557,214 – a ratio of 2.06.
Mr Oliver is predicting Sydney house prices to fall another 5 per cent this year and next year – a neat 10 per cent correction. If the resurgence in interstate migration keeps driving south-east Queensland population growth, it’s by no means inconceivable that the median Brisbane house price could grow by about 3 per cent a year. The combination would mean a more normal ratio of 1.8.
Such ratios are by no means law, but they help provide some perspective about price movements.
Note that these figures are for houses, not units, which Brisbane has an oversupply of at present. And they’re based on forecasts that might or might not come true. By comparison, the NAB quarterly hedonic house price forecast at the start of this month was for Sydney prices to fall 3.4 per cent this year and 1.2 per cent in 2019, while Brisbane houses were predicted to rise by 1.7 and 2 per cent.
Median sales price figures themselves are a little ropey, given Sydney encompasses markets as disparate as the inner city and the far, far south-west.
So what would a 10 per cent correction mean for Australia’s biggest and hottest housing market? Not much really.
Only a small proportion of the housing stock was purchased at the peak of the boom. Given the size of the rise, after a 10 per cent fall the vast majority of people will still own houses that are worth substantially more than they cost.
For the few who did buy at the peak, we’ve had such corrections before and lived to tell the tale. Owner-occupiers have bought the shelter they need anyway, so they tend to keep paying the mortgage and wait it out.
Investors looking for a quick turn when the market was running hot are likely to lose money. That’s just part of the game – the risk bit of the risk/reward ratio they were hoping to capitalise on. Again, our history says most will wear the pain.
The few who will need to sell at a loss – speculators caught short or individual circumstances such as divorce and job transfers – create opportunities for others.
But that’s not the stuff of scary headlines.