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What is the housing market doing ?

What is the housing market doing?


Australia's latest housing boom looks to have finished.

Auction clearance rates fell to 65 per cent or below in December 2002, and started 2003 unimpressively. The Reserve Bank has described "tentative signs of an easing in prices pressures" in the housing market, particularly in inner-city apartments, and notes that less homes are being auctioned. A study by research group Residex has detected early signs of falling prices. Valuation firm Herron Todd White estimates that Sydney, Melbourne and several other markets have passed their peak.

But the correction seems likely to be relatively gentle, rather than a sharp bust.

Clearance rates fall
Weekend auction  clearance rates: Sydney Melbourne

All Sept 2002



Nov 9-10 2002



Nov 16-17 2002



Nov 23-24 2002



Nov 30-Dec 1 2002



Dec 7-8 2002



Feb 8-9 2003



Feb 15-16 2003



Source: Australian Financial Review

... and so do some prices
December quarter price change for: Houses Units










Source: Residex/RBA

Coming off a high

Home owners saw the value of their properties leap in early- and mid-2002. Established capital city house prices jumped 17 per cent in the year to September, according to a recent study by the Australian Bureau of Statistics.

Brisbane was the top performer (up 25.4 per cent) followed by Sydney (up 21 per cent), Adelaide (up 20 per cent) and Canberra (up 18.5 per cent). Melbourne's property market ended the year on a low, showing comparative modest 10.7 per cent annual growth.
But late in the year, housing auctions began to signal a slowdown. The auction clearance rate - the percentage of auctions where the home actually sells - began to drop. During September 2002, the clearance rate slid below 70 per cent in Sydney, Melbourne and Brisbane, down from the highs of 78 to 82 per cent earlier in the year. By the weekend of December 7-8 2002, the Financial Review reported Sydney's clearance rate at 58 per cent and Melbourne's at 65 per cent. And early February 2003 results have been poorer than those for the same time last year.

A new study by respected property analysts Residex shows that in December, Sydney house prices stopped rising for the first time in two years. And Residex also found evidence that house prices in Melbourne and Brisbane had actually started falling. Residex's studies have been cited by the Reserve Bank as evidence that the market is slowing.

National valuation group Herron Todd White reported in its latest Month in Review publication that "urgency has retreated in most areas".

And the rental vacancy rate, another sign of coming market weakness, remains high.

Behind the slowdown

Factors behind the slowing property market include:

  • Global economic uncertainty and fear of war in Iraq
  • Falling investment returns and rising vacancy rates for investment properties
  • Fears that property markets are overpriced
  • Oversupply, particularly in the Sydney and Brisbane high rise apartment markets
  • Concerns about the impact of the drought on jobs and the economy

The combination of rising house prices and last year's rate hikes has also cut housing affordability. Housing is now less affordable than at any time since 1996.

Mixed predictions

Despite the factors pushing down the housing market, most experts expect prices to stall or fall slightly rather than collapsing. Their reasons:

  • The Australian economy continues to grow.
  • Rates remain low.

The Reserve Bank has signalled that interest rates will not rise until at least late 2003.

Here's a cross-section of views:

ANZ Bank: "The risk of a sharp contraction in house prices seems minimal given a steady interest rate outlook and reasonable economic growth prospects over 2002-03. Indeed, analysis of the 'fair-value' of house prices suggests there is scope for further price growth over the next two years, albeit at a reduced rate."

John McGrath, McGrath/APM Index: "In line with domestic uncertainty regarding the US economy and the Iraq/US standoff as well as the effect the current drought may have on the Australian economy, November saw a downturn in residential auction clearance rates around Sydney. This is the likely pre-cursor to a slowdown of capital growth over the next few quarters. However all indications are that it will be a slowdown and not a downturn, especially for the in-demand inner-city and beachside markets of Sydney."

Michael Davoren, Real Estate Institute of Australia: Mr Davoren says the latest quarterly review of Australia's major residential property markets points to a slowdown rather than a bust. "In the June quarter 2002, there were indications that the rates of growth in property prices were starting to slow down."

Simon Tennent, Housing Industry Association senior economist: "Significant risks (have) appeared in some very select areas of the market, in particular the higher density apartment market aimed at rental investors in Sydney and Melbourne - a market estimated to be less than eight per cent of the housing stock."

The Reserve Bank, long concerned about the rise in house prices, had singled out housing investment as particularly ripe for a fall. Reserve Bank deputy governor Glenn Stevens warned in mid-October that "it is getting harder and harder to believe" that returns on housing investment justify today's valuations.

But the Reserve is now less anxious. In its November Statement on Monetary Policy it noted "some signs" that price increases were coming to an end. It added that apartment price growth was slowing, that "recent anecdotal reports point to a more general waning of buyer interest", and that auction clearance rates had fallen.

 The best-chance outlook for 2003: a settled market

The most likely outlook for 2003 is a more settled market. Prices and demand for most types of housing are likely to return to more sustainable levels of growth and rates steady. The most obvious stabiliser is interest rates: they're likely to remain on hold well into 2003, waiting on an improvement in the world economy. See our rate rise briefing for more information.

Brisbane is tipped to take over from Sydney as the engine room of growth in property prices. After a frenetic three years, Melbourne faces a much more subdued market, with strong inner city prices offset by static prices further out. A shortage of land for development in the fringe outer suburbs will underpin the first home buyer market.

But forecasting the housing market remains as tricky as ever. An economic pick-up could see rates rise and send buyers running from the market. Or the boom could pick up speed again, as it did at the end of 2001.

Demand for most housing in 2003 will be affected by:

  • Interest rates - rates are now on hold, but any significant rise later this year will hit home owners and buyers hard
  • Economic growth - With national economic growth predicted to slow in 2003, housing markets will feel the impact of falling rural incomes and lower investment.
  • Rising vacancy rates - Rental vacancy rates remain high, driving down rents and depressing returns.
  • The apartment glut - Oversupply in key markets like Sydney, Brisbane and Melbourne could lead to negative returns and reduced investor confidence
  • Grant scheme - The First Home Owners Grant scheme has been a key driver of the current boom, pushing up demand and prices. The removal of grant-driven demand up will have a significant dampening effect, particularly among first home buyers.
  • Global conflict - A Middle East war or further terrorist attacks may impact on global growth and further slow Australia's economy

Outlook uncertain to 2005

Predicting the next three years of the property market is tougher than ever right now. With war and recession looming overseas and the national housing market boom at an end, buyers should make sure they are prepared for the possibility of a poor market as well as a return to price growth.

Economic forecaster BIS Shrapnel predicted last year that housing prices would rise by 2005 in Australia's four largest cities - by 27 per cent in Brisbane, 22 per cent in Sydney, 16 per cent in Perth and 13 per cent in Melbourne. At the other end of the spectrum, UBS Warburg suggested prices could fall 22 per cent by 2005.

Uncertainties have only grown since those predictions were made.



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