Residential Market Slows

For the last year, strong demand has led to high auction clearance rates and marked growth in residential real estate values nationally. However, it’s now official – clearance rates have slumped after the compounding effect of six interest rate increases since October, tightening lending criteria and a worsening European financial crisis.

Eight weeks ago, Melbourne was riding the crest of the demand wave with a clearance rate of 85.3 per cent. That’s now fallen to 69.4 percent. Similarly, Sydney was enjoying a clearance rate of 73.7 per cent but that’s now just 63 per cent. However, while these are the nation’s two largest auction markets, they’re only a small proportion of all dwelling transactions nationally. Still, the traditionally weaker auction markets of Perth, Adelaide and Brisbane have eased as well.

In contrast though, the total number of auctions taking place has remained very strong and measures released yesterday by RP Data indicate that although prices growth has slowed, home values are up nationally by an average of 0.2 per cent in the month of April and 2.4 per cent for the quarter. Of concern though is the change in direction for both Brisbane and Perth values, with the former dropping 0.5 per cent and the latter 0.6 per cent in the April quarter. Could this be the beginning of a downward trend?

The Government’s planned imposition of a Super Profits tax on mining companies is affecting confidence as it attempts to position the tax as a battle between big business mining and average Australians. With several future mining projects either now on hold or cancelled, it may still be too early to be sure whether this is having direct effect but both Western Australia and Queensland have shown anecdotal evidence of cooling consumer sentiment and, as the above figures confirm, a slide in prices.

Last week, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) contributed conflicting commentary on Australia’s housing position. The IMF suggested that its analysis of housing slumps since 1970 shows home prices will fall much further and for much longer. In a report in The Australian, its economist Prakash Loungani said previous slumps had lasted on average for 18 quarters, with prices dropping 22 per cent. The current housing slump has lasted only 14 quarters and prices have dropped just 15 per cent.

Prices have dropped 15 per cent? Not according to Australian data. Taking the opposing view, The OECD was more upbeat, even though it predicted at least four more rate rises, and most likely five in the year ahead. It suggests the RBA will finish the year with a cash rate of 5.1 per cent by December and push on to 5.7 per cent by next June.

This is completely at odds with Australian financial markets, which are anticipating a tightening of only 0.25 per cent over the next year. Yet, despite the OECD’s gloomy interest rate outlook, it still expects demand for Australian real estate to remain strong, ‘bolstered by immigration’ and above average economic growth – exceeding 3 per cent. New South Wales is paying the price for the State Government’s introduction of a new property tax which is making new construction less attractive for developers. Brisbane also appears to have fallen out of favour, with big residential developers pinning hopes of future profits on Melbourne, Perth and Adelaide.

Stockland have recast their product to the affordable end of the market and will be relying on the ‘boom market in Melbourne’. Its recent investor update says that 50 per cent of all jobs created in the past 12 months were created in Victoria and that the state has been more successful than any other in tapping the population surge driven by migrants from China and India. Billionaire developer Lang Walker is firmly focused on Adelaide as well as Melbourne, and most other developers are following in his footsteps.

The RBA Board met to yesterday determine what action to take with interest rates for June. The weakening market indicators and falling Australian dollar led to a hold in the official cash rate.