Do falling prices signal the end of the property cycle?

Is this the end of the current property cycle?

The media has been busy reporting the biggest single-month decline in house prices in more than five years, after RPData recorded dwelling prices dropped 1.9% in May.

With a few property pessimists suggesting prices will fall further, let’s do a quick Q&A to see what’s really going on.

What do the stats actually show?

The following table shows that values were down across most capital cities with Melbourne suffering the biggest fall of 3.6%:

Source: RP Data

However, I should explain that month-to-month indexes have proven somewhat volatile in the past and RPData’s house price index has seasonally dipped in each of the last three May month surveys only to pick up shortly afterwards.

What’s behind the fall in property prices?

Looking back, the growth in our property markets peaked last August, and while prices were still rising till recently, they have been growing more slowly.

At the same time, consumer confidence has been falling and since the recent unpopular federal budget, confidence has dropped faster than when the GFC unfolded in 2008.

Source: ANZ Bank

Lower consumer confidence and concerns regarding job security leads to fewer property transactions as people put off their buying decisions, which in turn leads to lower growth or falls in property prices.

One more thing: the boom in apartment developments in Melbourne has created an oversupply in some suburbs and has forced down rental yields for investors.

Home prices couldn’t lift forever

As I forecast at the beginning of the year, house price growth in 2014 was never going to be what it was last year – with inflation less than 3% per annum, house prices couldn’t sustain long-term double-digit growth. 

So this pause in the market is healthy.

Source: RP Data.

After surging for almost one-and-a-half year’s price growth started slowing in the last quarter of 2013 and the fright many Australians received from the recent federal budget seems to have caused many would-be homebuyers and investors to pause and take stock.

Digging deeper into the figures, the prestige end of the market seems to be bearing the brunt of the price falls, but this segment has always been more affected by business sentiment and the performance of the share market than the more affordable end of the market.

What about lower auction clearance rates?

Over the last few weekends the auction clearance rate has been lower than it was the same time 12 months ago, giving some pessimists further cause for concern.

What they forget is that there are hundreds more properties being put to auction this year and, in general, the market appetite has been there with auction clearance rates only retreating back to long-term averages.

Of course auction sales account for less than 20% of total property sales around the country and SQM’s Asking Price Index suggests that vendor sentiment (which correlates very well with future price growth) is still reasonably strong.

Does this mean that it’s the end of this property cycle?

The simple answer is no!

Despite what a few property pessimists might be saying, most analysts believe there will merely be slower property growth.

What will eventually stop this cycle is interest rates rising 1-2% and that’s a little way off because with the property markets taking a breather, it’s likely that interest rates will remain on hold a little longer.

The fall in prices is likely to just be seasonal, with the next month or two probably showing stabilisation in the house price series. 

However, in the medium term, our real estate markets will remain underpinned by:

• Strong population growth;
• An improving economy (just look at this week’s strong GDP result);
• Low interest rates;
• The banking sector’s relaxation of lending standards;
• Strong overseas investor interest and more Baby Boomers buying property in their SMSF;
• The momentum of the market with more investors wanting to take advantage, of the lull to get on board the property ladder; and Improving consumer confidence.

So what does this mean if you’re looking for property?

Firstly, here’s what you should not do – and that’s listen to those who are suggesting buyers hold off while property prices fall further.

Our experience being in the property markets on a daily basis suggests there is still significant pent-up demand, with more buyers out there than there are good properties. However, secondary properties are languishing so buyers must be very selective.

Remember you’re not buying “the market” so it’s always a good time to but a good property – either your new home or an investment – at the right price. Just be realistic about your growth expectations and remember to factor in a financial buffer for the inevitable rise in interest rates.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy.