Property panic – don’t believe the hype

With ever increasing media attention focused on our national property markets, it’s sometimes difficult to sort through all the information and statistics bombarding us every day. Whether it be on the TV, in the papers or on the radio, it seems like everyone wants to tell us how poorly property is faring. But what’s the real story?

Sure, the real estate markets have slowed down from their booming conditions of the first half of this year. And although the doomsday speculators would like us to believe this is the end of the world as we know it, the truth is there are always peaks and troughs in the property game. It’s just the way the markets works.

So, let’s try to make some sense of what is happening in the market…

The primary scare tactic over the past couple of weeks has been in regard to so called flagging “auction clearance rates”.

Melbourne particularly, with its status as the auction capital of Australia, has come under fire from the press. The weekend papers are reporting the recent falling auction clearance rates as the “End of the property boom” and “Auction market continues to cool as experts warn of potential price falls.”

But just how close to reality are these predictions?

Media outlets like to focus on clearance rates as a barometer for how the property market is faring, and how confident buyers and sellers are in the marketplace. And yes, auction clearance rates have been dropping off lately from the record highs some cities were experiencing earlier this year.

But before you start to panic and wonder if you should offload your property portfolio, consider this… just like any other statistic related to property, auction clearance rates need to be examined from a number of different perspectives.

And the good news is, when you stop to reflect on just what these figures really show, the overall picture is not as bleak as some would have us believe.
Firstly, let’s look at the reported auction clearance rates for the two big Australian auction markets, Melbourne and Sydney, for the first weekend of July:

• Melbourne – 551 reported auctions with a 60.6% clearance rate.
• Sydney – 525 reported auctions with a 59.6% clearance rate.

Okay, so in Melbourne real estate agents enjoyed the unprecedented luxury of selling almost all of their auction stock for the better part of this year. But the reality is that auction clearance rates of 70% to 80% plus, such as we were seeing earlier this year, are unsustainable and only occurred because we had a short sharp hard burst of buyer activity due to pent up demand from both owner occupiers and investors.

In fact, during much of the last decade and particularly in the heady property markets of 1997-2003, auction clearance rates in Melbourne consistently sat in the mid-60 percentile range – further illustrating that what occurred earlier in the year was completely out of the ordinary.

The clearance rates do not really indicate an unhealthy property market in critical decline. When you look at the overall picture rather than taking these figures at face value, the inner suburban property markets are still quite vigorous. It’s all about interpretation.

You see this time last year there were less than 300 properties up for auction in Melbourne with a clearance rate of around 70%, and this year there was over 550 properties offered for auction, which means many more properties were sold this year than the same weekend last year. In other words, the market is still healthy and in actual fact, it would seem that there are many more sellers and buyers out there.

That being said, there is no denying that these clearance rates do indicate a change in market sentiment. It’s certainly nothing to panic over, but it is true that things have slowed down somewhat from the breakneck speed certain markets reached earlier in the year.

So what does this changing market sentiment mean?

Well I think we can safely deduce the following:

• With all the mixed messages in the media and economic and political uncertainty, potential buyers are being more cautious and more selective.
• More vendors are putting their properties on the market, spurred by the recent round of record price results and many wanting to get in before interest rates increase again.
• Good properties are still selling – but buyers are being more selective.

The fantastic news for investors is that any slow down in the market will create opportunities for buyers who take a long-term perspective.

How does this work you may ask. Well, life still rolls on. People are still getting married, people are still getting divorced, people are still having babies, over 200,000 immigrants are relocating to Australia this year alone, and so on and so on.
And the bottom line is this – bricks and mortar is an essential commodity – everyone needs a roof over their heads. And if they don’t buy a home, they’ll rent one; thus over time property prices and rents will just keep going up.
One of the key factors to watch out for this year will be interest rates. There is no doubt that if the Reserve Bank hits would-be home owners with a further interest rate rise or two this year, the market’s confidence will change considerably once more.

Well… there are other statistics that are telling us that the property markets are booming. Are they correct?

Yes the median house price around Australia has gone up over 10% in the last 12 months to May according to Residex.

However, while in general median prices in our capital cities have grown strongly and seem to have taken the recent interest rate rise in their stride, on closer examination not all suburbs are fairing well. A recent report from Residex shows that many suburbs experienced falling property prices over the last quarter:

Again this means is you really can’t believe the hype in the media and you have to interpret the figures more carefully.

So, what can we believe?

You can bank on the fact that in the long term the value of well-located capital city properties has doubled every seven to 10 years. Sophisticated property investors know this and buy properties that outperform these market averages by purchasing properties with an element of scarcity. They also love these periods of uncertainty like we are currently experiencing and exploit the lulls in the market to buy the type of property they would have had to fight harder for a few months ago.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.