Is the market going up, down or sideways?

Posted by Luke Graham

Over the weekend, the Australian Financial Review published the attention-grabbing headline: House prices set to fall as discounting doubles. Referencing Domain data on vendor discounting, this article highlights the increasing proportion of home sales around the country being sold for less than the vendor had advertised. These statistics are not surprising, but they are very easily misinterpreted.

As we have discussed several times since the outbreak of coronavirus, we expect the number of home sales to be less than usual. There are two primary causes of this:

Government restrictions such as social distancing make elements of the buying process (such as auctions and open house inspections) more difficult.
The economic uncertainty caused by coronavirus makes it inadvisable to sell a property unless you absolutely have to. That is to say, unless you are a highly motivated seller.

Since home sales are lower in quantity (number), the proportion (or percentage) of homes sold at a discount will be higher – even if they have actually reduced in quantity themselves. This is because the proportion of homes sold at a discount is a direct function of the quantity of home sales altogether (which we know has dropped substantially).

In essence, if there are usually 20 sales in your neighbourhood each month and 4 of them are sold at a discount to the advertised price, then 20 percent are sold at a discount. If the number of sales per month declines to 10 but there are still 4 sold at a discount, the percentage sold at a discount is now 40 percent.

The lower volume of home sales across the country is prompting some commentators to forecast corrections to some markets. These forecasts vary significantly, but are reminiscent of those made during Sydney’s regulation-triggered correction of 2017-19. When it comes to these forecasts, we would again gesture to the expected jump in proportion of highly motivated sales. This will naturally cause median house price statistics to fall, but that does not reflect the inherent value of a dwelling unless the owner decides to quickly offload it while sales volumes remain low.

Adding to the confusion of those paying attention are anecdotes of successful auctions in excess of $100,000 above reserve price and recent data from ANZ showing that average new loan sizes are still increasing despite current circumstances. Factoring everything together, you may feel compelled to ask what is actually going on.

As we discussed in a recent research blog article, the answer to this question is best represented by our prime minister’s reference to hibernation. Although some homes are achieving miracles at auction while others are facing a desperate need to sell despite the terrible timing, the majority are finding that holding onto their asset is their best option. Essentially, the Australian property market is in a self-imposed trading halt.

Posted by Luke Graham, on 19th May 2020