The market is not falling, it is correcting

Properties are still selling. It just takes longer, and more are selling prior to or post auction. Sellers with sensible offers prior are more willing to accept them, and buyers are less willing to bid up at auction (and will often negotiate to closure post auction).

The property market has weakened in 2011, with RP Data figures showing a quarterly decline of 2.2% nationally for the March quarter. For Sydney we registered a decline of 1.1%. More specifically, Sydney auction clearance rates have hovered around the 52% to 58% mark in the past few months.

Understandably, many opportunistic buyers are making lowball offers, citing declining market conditions. Vendors who need to sell may choose to accept below-market prices, thereby negatively affecting the prices of neighbouring properties. However, vendors who are able to wait will either hold out for a higher offer or simply take their property off the market. Not surprisingly, the time-on-market for properties right now is longer than a year ago. Many selling agents are now also advising their vendors to sell by private treaty rather than auction.

The data may seem ominous, but is in my opinion a necessary consolidation on the above-average (and unsustainable) gains of 2010. It comes at the same time that Australia has experienced its biggest quarterly contraction since the early 1990s recession, with gross domestic product (GDP) falling 1.2% in the March quarter. This macro data can be attributed largely to the flood impact on Queensland, and it is believed by many that the data indicates it should be a one-off fall in GDP.

So property markets are down in line with GDP, which is expected to rebound shortly. I would expect the same of the property market. Keep in mind also that winter also tends to be a slower season for the property market. As the weather warms up, property action also tends to follow.

Rental yields are now rising (largely due to undersupply of housing). Sydney’s gross rental yield for units is now 5.01% (2.3% quarter-on-quarter growth) and houses 4.38% (2.7% quarter-on-quarter growth) according to March 2011 APM data. We can expect this to continue, and it will bring more investors into the market as the negative cashflow burden (net carrying cost) on property investment lessens.

While I do not expect on average 10+% capital returns to property ownership over the medium term, I think we can count on a more moderate 6% to 8%, which can be added on top of rental yields of 1% to 2% higher than they have been in the recent past. The cash rate at 4.75% has not been raised by the RBA since November 2010, and recent GDP figures are likely to postpone any rise for a bit longer. This combined return on property investment will be attractive to leveraged property investors and will no doubt pull them back into the market. As a reflection of this, the level of inquiry we have received from investors has increased considerably in recent months.

Despite media reports, what we are experiencing right now is far from a crisis. The only crisis I am seeing is a crisis of confidence as buyers are more risk-averse than before. The herd mentality of buyers also means that many are hesitant to make a move for fear of buying during a downturn (no matter how mild). Many buyers therefore choose to simply sit on the sideline and watch what unfolds. Unfortunately, by the time the market does bounce back, it may well be too late for many buyers, who would have missed out on some genuinely good opportunities.

In a changing market, it is important to stay rational. For example, there have been several news articles on homes that have been heavily discounted (some by nearly $1 million, apparently). One might interpret this as the market going into a total collapse. But a more likely reason behind such heavy discounting is that the property was seriously over-priced to begin with.

Ultimately, if you believe in Australia’s fundamentals, then the current property consolidation phase should be taken as a positive. Nobody likes a bubble that bursts. It is better that we have a pause now and robust growth in the future.

Oliver J. Stier is the director of OH Property Group. In addition to being a licensed real estate agent, Oliver is also a chartered financial analyst. You can follow Oliver on Twitter at www.twitter.com/ohproperty.