Melbourne and Sydney clearance rates are the result of returning buyer confidence: Mark Armstrong

The transition from market observers to market participants has begun as clearance rates jump by around 10% from where there were this time last year.

The property market recovery appears to be now entering a new stronger phase but clearance rates above 70% in Melbourne and Sydney should not come as any great surprise as we first saw signs of this recovery almost 12 months ago.

The property market is cyclical and buyers will only stay out of it for so long. Many have been sitting on the sidelines watching proceedings and waiting for the right time to move.

When we look at the broader financial factors that drive consumer confidence in the property market there were clear signs that it was not a question of if the market would bounce back, but just a matter of when.

There were a number of factors that indicated a market recovery.

Affordability – a high Aussie dollar has put pressure on our manufacturing sector and this has been on the RBA’s radar. As a result the RBA has lowered the cash rate by 75 basis points in the last financial year.

Falling interest rates instantly increases affordability. Buyers rushed back to the market in 2001 and 2009 mainly due to falling interest rates. The main difference this time around is it has not come packaged up with increased first-home buyer incentives. This means that the first-home buyers markets will lag behind the broader market.

Capacity – The graph below shows many Australian households have continued to save their disposable income. Many borrowers have been using these funds to make substantial excess principal repayments and this has increased their equity and cash flow positions.

Many buyers are now coming to the realisation that they cannot stand around watching the market forever and they now have the financial capacity to act.

Demand – Home ownership in Australia is very high with around 70% of people living in a property with their name on the title. The needs of a homeowner change over time whether it be the need to upsize or down size. Although many owners have put these plans on hold the necessity to change is forcing them to make their move.

Further property is a great Australian past time and this continues to be the case.

Web statistics show that, although competition from buyers was relatively soft in 2012, web browsing continues to be very high.

Nielsen’s online analysis of real estate portals suggests more that 3 million Australian’s search for property every month. That means around 15% of the entire Australian population are actively looking at property at any one time.

This activity is now flowing into the physical market and is driving up clearance rates.

The gestation period from market watcher to market participant is moving into the next phase as the broader market catches on that prices have bottomed out and there is only one way they will move from here.

Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.