A family friend working in real estate recently told me:
‘Well, there are plenty of sellers, and also plenty of buyers,…but never the twain will meet.’
It’s a tough challenge to bridge the expectations of the two parties.
But right now, buyers have the upper hand. They know there’s a fair chance that all they have to do to get a better price – is wait.
And if the recent analysis on the Melbourne property market is right, it will be worth their while waiting a bit longer…
The average capital city property is already down by around 8% from the start of last year. But it seems that sellers are finding it hard to accept that this figure could possibly apply to their home too. Which is part of the reason ‘never the twain will meet’.
This is the latest chart from the Reserve Bank of Australia (RBA) showing what’s happening to property prices around our main cities. This was updated a few weeks ago, so should be pretty current.
Talking about ‘the Australian property market‘ is a bit like talking about ‘the stock market’. It overlooks that it is made up of many very different sectors. For example, property in the city of Brisbane has fallen around 10% from its peak – but Victorian regional property prices in regions like Bendigo have actually increased by 8% in the same time.
But I want to specifically take a look at the Melbourne property market, which is starting to look pretty ugly.
This is the blue line on the left hand side of the chart. I’ve circled it to highlight it.
Melbourne property prices are rolling over really quite sharply now, and are tracing the steepest decline of all the cities by far.
So what’s happening in Melbourne to cause it to suffer more than the other cities – and how much worse can it get?
Morgan Stanley Equity Research summed it up in a report yesterday, saying:
‘…with record levels of stock on market, and record levels of dwellings under construction, the Victorian residential market is precariously poised for continued pricing pressure.’
According to SQM research, the record level of ‘stock on market’ in Melbourne is now sitting at around 41,000 unsold houses (and 14,000 apartments). This level of stock has been increasing steadily, and is now double what it was just two years ago.
A note from Goldman Sachs a few weeks back suggested that the true clearance rate for Melbourne property at the time was in fact 11.8%, rather than the official 55.8%. Apparently the properties with no bids aren’t used in the final calculation…which is a bit like being on a diet – but not counting the food that no-one sees you eat.
As for ‘the record levels of dwellings under construction’, the number of apartments under construction is now about 80% above the long-term average.
The Melbourne property market was a favourite for developers, but it now looks like they might have got a bit carried away.
For years, we’ve had the property bulls banging on about a ‘housing shortage‘. Your regular editor, Kris Sayce, has taken that argument to pieces countless times since 2009.
Now we have recently heard from the National Census that Australia’s population is about 1% less than thought. The result is that the National Housing Supply Council’s estimates of a 228,000 undersupply of housing, could actually be an official oversupply to the tune of 341,000 properties.
So we now officially have too much supply at a national level, but even more so at Melbourne level – but what about demand?
Debt is the lifeblood of the property market, but people are now borrowing less. The size of the average loan is 4% less than it was a year ago, and the number of loans made is starting to contract for the first time in decades. With the housing boom driven by available debt and rampant property speculation, the opposite is also true. The falling property market will partly be a factor of debt contraction.
So Melbourne’s case is a particularly potent mix of oversupply and weak demand.
And this comes at a time that Melbourne is the least affordable city in the country.
It has a long way to fall to return to the historic trend. But if you think the outlook for Melbourne already looks bad…it gets worse.
Melbourne property prices are in fact so bloated, that Melbourne scored as the 4th most unaffordable city in the WORLD. This is measured from the 325 major global cities in Demographia‘s recent survey.
This puts things in context, and shows just how much scope there is for Melbourne property to come back to a more sensible level.
Speak to 10 commentators, and you’ll get 10 different opinions of what Australian property prices will do next. But Morgan Stanley’s Equity Research team is one of the few institutions that called it pretty much spot on. I sold my property last year based on their views, so I like to keep an eye on their research.
And their prediction is for more pain in the residential property market.
On top of whatever happens in the second half of this year, they see a fall of 12% in 2013, and then a drop of 9% in 2014.
Assuming the market creeps down a bit more during the second half of this year, to finish 10% below the peak, then by the end of 2014 these predictions would see the market fall by a compound total of 28% under the peak.
With so much stock on the market, and buyers sitting on their hands, the stage is certainly set for some fireworks in the coming months and years.
Dr. Alex Cowie
Editor, Money Morning
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