Troubling signs for house prices
IF YOU are looking for dark signs and ominous portents in the housing market, I can help you out. I went to an auction in my suburb and made a mistake I hadn't made for years - over-estimating how much a place would sell for.
The house was a deceased estate, I think. It was old, un-renovated and actually quite filthy inside. The estate agents had obviously decided any buyer was going to knock it down. (Except the facade. Heritage protections are powerful round here.)
About 100 people showed up at the auction and I reckoned $1.9 million was plausible. This guess was based on a bunch of auctions where I had thought the place was worth a bit over a million, and seeing them go for well over two (or more).
Instead of $1.9 million, the place went for $1.76 million. (Which is a huge sum, don't get me wrong. I sure as heck could not afford it!) When bidding began to dry up about the $1.7 million mark, I knew that I was seeing something. The market was defying my expectations still, but in a different direction to what I expected.
The evidence backs up my hunch. The property market in Australia has changed in a real way. We see prices falling slightly in Melbourne, Adelaide, Brisbane and Perth so far this year, but especially in Sydney where prices are down more than 2 per cent. That is dragging down the national average into negative territory. It has fallen for the last seven months as the next graph shows.
WILL IT LAST? OR IS IT A BLIP?
Will the dip last? If it will, then buyers should back off and vendors should try to sell ASAP before things get too bad. But if the dip will be brief, then anyone selling a home should hang onto it and buyers should pull the trigger now.
Last week brought a new clue to where the market is going. Brand new evidence shows Australia is now building fewer new homes. Builders and property developers are getting nervous and scaling back. They don't want to get caught with an apartment tower half-finished and find that by the time they're done they can't sell it.
What is interesting is that building has not collapsed altogether. This next graph shows the building boom that began back in 2012 has slowed. The value of new construction is now lower than it was in 2016 and it has been falling steadily, but not rapidly.
In the most recent year, the amount of residential building work done fell by 2.5 per cent. That's a sign of caution in the market but it also leaves the amount of new building being done at a high level. If prices start falling fast, there will still be a lot of new supply hitting the market.
Builders and developers have probably taken into account that prices can't rise forever with wages growth being so meagre. What they may not have considered - and fair enough because nobody really expected it - is the effect of the Banking Royal Commission.
Banks have to get back on the straight and narrow and that is going to mean handing out fewer home loans. That hurts first home buyers, and if prices of existing homes are falling too, that cuts into the amount second-, third- and fourth-home buyers can spend when they move. It is a tricky situation. If they had anticipated this, the building industry might have scaled back supply even more.
Only time will tell if prices are going to recover promptly or if this downturn turns into a long slump.