Property’s buying window opens: Wakelin

Don’t get too excited about reports of clearance rates improving around the country. Last week, several commentators suggested that auction clearance rates showed that Melbourne, Adelaide and Brisbane had reversed the falls of the past 12 months, while th

Don’t get too excited about reports of clearance rates improving around the country. Last week, several commentators suggested that auction clearance rates showed that Melbourne, Adelaide and Brisbane had reversed the falls of the past 12 months, while the Sydney market remained flat.

Clearance figures do show an inconsistent picture. Last week’s figures from Australian Property Monitors (APM), for example, showed Melbourne lifting from 47.3% to 52.9%, Brisbane from 17.3% to 32.1%, and Adelaide from 30.4% up to 42.1% after a slow 2008.

But APM’s senior economist, Liam O’Hara, is quick to caution, citing the unreliability of this data. “These weekly clearance rates have a small sample size and show a lot of week-to-week volatility.”

If clearance rates are on the way up, does this signal an improving property market? Well maybe, but before we pass judgement on the state of the market, we really need to know what the clearance rates measure and what it means to the property investor.

Auction clearances give an instant snapshot of the market, telling us a lot about prices, suburbs and auctioneers. Auctions are far more prevalent in Melbourne and Sydney, at about 50% of market sales, where they are the dominant sales form in the sought-after suburbs.

Auctions account for a smaller portion of the market in Brisbane, Perth and Adelaide and in the outer suburbs and regional areas of all states. Where auctions are not the dominant method of sale, the clearance data is less meaningful.

Clearance rate information is compiled from real estate agents’ reports of properties sold at, before or after auctions. Investors should note that reporting is not mandatory and will not include properties withdrawn from sale.

Sharp-eyed investors will also notice differences between clearance rates reported by different newspapers, the Real Estate Institute in each state, and APM, which can be explained by timing differences of agents reporting over the weekend or when some agents won’t report failed auctions.

Asset consultant Ken Atchison, of Ken Atchison and Associates, has a different view: “The real issue is not the clearance percentage at all; it’s the underlying volume of successful sales transactions. This gives investors a truer picture of the market.

“For instance, a falling clearance rate can superficially mask a strong market if the supply of property lifts over a short period, so it’s not as reliable an indicator as it first appears.”

Plainly then, high clearance rates can point to insufficient supply rather than a buoyant market, and low clearance rates, particularly in Brisbane, Adelaide and Perth, may not reveal a strong volume of successful private sales.

“Prices will prove relatively stable as the supply of new stock has been restricted in recent years, although I wouldn’t be expecting any price rises in the short term and all bets are off if there is a big fall in employment,” Atchison says.

O’Hara is slightly more bearish: “We’re seeing the financial contagion effect major economies around the world and it will touch us here. I think we will see all fields of the economy affected and house prices won’t be immune. Falls of up to 10% are on the cards. In some parts of Sydney, the median house prices are nine times the median wage for that area, which implies debt levels will need to fall soon.”

In my view, even if O’Hara’s prediction is correct, a 10% fall would be a boon in affordability for home buyers and aspiring investors alike.

What’s more, although the top quartile of the market may be doing it tough, prospects for the under-$600,000 market are starting to look brighter. The doubling of the first-home owner grant to $14,000 for established property has given great incentive to those wanting to enter the market and these buyers are out in force – just looking at the moment, but with all the indications they’ll be ready to buy in the early part of 2009.

I’m also noticing an increasing number of investors making appointments with advisers such as myself; they’re calculating how falling interest rates and rising rents will boost their prospective cashflows.

In the short to medium term, I see an increase in demand and then price rises becoming more evident in this sector by mid to late 2009; good news for investors already in this market and for those who buy judiciously before March 2009.

This story first appeared in Eureka Report