Auction clearance rates largely irrelevant, but confidence perhaps returning to property market: Terry Ryder

Real estate agents in the major cities are rejoicing at what they see as a return of buyer confidence. 

There is a lot of excited chattering about the so-called super Saturday auction events, with an increase in the number of homes offered and better clearance rates than at the same time last year. 

But self-absorbed agents and lazy newspaper journos over-rate auctions as a market barometer. Auctions account for a tiny share of residential property sales and mostly at the upper end. They say nothing about the mainstream market, where the bulk of sales occur. 

Multimillion-dollar sales in the prestige suburbs of Sydney and Melbourne are largely irrelevant to an informed discussion of market trends. 

What does matter is the rising number of indicators of positive movement in markets around Australia. Loans to owner-occupiers are trending steadily upwards, rents are rising in many cities and there is evidence from multiple research sources that prices in the capital cities have stabilised – and in some cases are rising gradually. Many surveys indicate buyer sentiment is improving.

Improved clearance rates, if you can believe the figures, can be added to the growing pile of positive market indicators. In isolation they don’t mean a great deal – perhaps their greatest significance is that they reflect the recent improvement in buyer sentiment. 

Confidence has been the key ingredient missing from our property markets. All of the other factors that underpin real estate – the strength of our economy, low levels of unemployment, rising incomes and falling interest rates – have been firmly in place, but without confidence people won’t buy. 

Now we are perhaps seeing that critical shift in confidence. The latest MFAA House Price Expectations Lead Index finds “a continued rebound in buyer sentiment”. The index rose to 90.6 from 84 in March, and compares with the low of 73.5 in September 2011. 

“House price expectations have improved substantially,” the index report says. “Three-quarters of respondents believe that house prices will remain stable or increase in the December Quarter, up from 67% in March and 53% in the September Quarter in 2011.” 

The most bullish about prices are people in Western Australia and New South Wales. 

The survey found that “the health of mortgagors remains high”, with 78% of respondents “finding it easy to make loan repayments”. 

Those who believe it’s a good time to buy cite affordability and low interest rates. 

This is true also for first-time buyers. “Two-thirds of those who say it’s a good time to buy say it’s because prices are cheap and interest rates are down,” it says. 

Of the “next-time buyers”, 59% are likely to consider buying an investment property, rather than change/upgrade their home. Of those intending to buy an investment property, 78% think now is a good time to buy, and again it’s because of low prices and interest rates, leading to improved affordability.

It’s significant that there is no mention of government assistance like grants or stamp duty concessions. Around Australia there is a raft of incentives from state and territory governments, mostly for the creation of new homes rather than the purchase of existing ones. Some of them are exclusive to first-time buyers while others, such as the new measures in South Australia, are not. 

This reiterates my point, expressed in previous columns, that government grants and concessions are largely irrelevant to buyer motivation because they are poorly conceived and targeted. 

The level of prices and interest rates is far more important. This was the case last time city markets were strong, back in 2009. Many commentators assumed it was inspired by the federal government’s grant to first-home buyers, but multiple surveys at that time found that buyers were motivated first by very low interest rates and secondly by low prices, the combination of the two creating a marked improvement in affordability. 

Affordability rules, which is why the best capital growth rates are found in the cheaper areas of our major cities – the places where auctions are least likely to occur.