As we move into October with spring truly sprung, and the traditional selling season in full swing, it is a good point to take stock and see how the market is tracking compared to this time last year.
If you read our August 2019 market update overall dwelling values increased in August +0.8% across five of the eight capital cities. This was significant as it was the first rise in values over a three month period since November 2017. Despite these positive signs, the market still faces significant headwinds, not least recovering from the downturn.
But let’s first remind ourselves how we got here.
How did we get here?
Historically, the factors driving the recent slump are complex but tighter lending criteria, as prescribed by the Royal Banking Commission, alongside ongoing unaffordability and a scarcity of foreign buyers all conspired to put a damper on the market in 2017. This led to a decline in Australian dwelling values of -4.8% in 2018, in what has become the weakest housing market conditions since the GFC era.
"The driving factors of the recent slump led to what has become the weakest housing market conditions since the GFC era."
So what, if anything, has changed since this time last year?
Spring 2018 vs. Spring 2019
All the headlines in 2018 were about the slump, with property values falling across the country.
Look at the data for September '18 and you can clearly see the slowdown taking hold from the 2017 peak, with dwellings down -6.1% over the year in Sydney - the country’s most expensive property market - for a median dwelling price of $847,948.
Nationally the market was down -2.7% for the year with median prices at $550,610. Clearance rates for this time tell another story, with Sydney recording a figure of 51.1%, and Melbourne slightly more positive at 53.8%, with the weighted average for all the capital cities at 52.4%.
It has been a similar story in September 2019 with many markets still on the slide, but losses are being stemmed in some locations as buyers became active, particularly in Sydney and Melbourne. Sydney’s annual return is still negative at -4.8% for a median property price of $805,424, but up +1.7% for the month.
Analysts CoreLogic describe it as, ‘a housing recovery that is gathering momentum, with national dwelling values up 0.9%’. Clearance rates are noticeably up with Sydney (74.5%) and Melbourne (74.4%) dragging the other capitals with them for a weighted average of 70.0%.
Storm clouds on the horizon
There are however storm clouds on the horizon that are not associated with meteorology, rather a weakening in construction activity. The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (PCI) reports that construction activity - and apartment building in particular - have actually contracted for the past 11 consecutive months.
The implications of this are a slowdown in jobs, and a clear sign of weak demand for property in general. Many analysts believe this is largely why the RBA recently decided to cut interest rates by 0.25% to a record low of 0.75%. Household debt is another concern, which leaves the nation vulnerable to a major economic shock.
"Construction activity - and apartment building in particular - has actually contracted for the past 11 consecutive months"
And while clearance rates have shot up this year, with Sydney and Melbourne at their highest levels since early 2017, listings are down compared to 2018.
The high clearance rate can be explained by the presence of more buyers - particularly first timers and low interest rates - in the market, but sellers are being more cautious as they wait to see exactly where the market is headed.
Corelogic’s Monthly Housing & Economic Chart Pack, October 2019 reports that, ‘...the number of auctions being held remains low relative to recent years, and the volume of stock for sale remains lower than it was a year ago with new stock being listed for sale almost 20% lower nationally’. Weak supply could therefore be the banana skin that puts a handbrake on the market in the months ahead.
Green shoots, in some markets
Despite this, there are definitely green shoots starting to poke through in some markets.
First up, according to CoreLogic the national index posted the largest monthly gain since March 2017, largely due to increased activity in Sydney (+1.7%) and Melbourne (+1.6%). On a quarterly basis, both cities are positive - with Sydney up +3.5% and Melbourne +3.4%.
They are however still in the red over the year to date, with Sydney down -4.8% and Melbourne -3.9%. In terms of median values Sydney is still the most expensive city to buy a property at $805,424, while Darwin is the most affordable at $389,214.
"The most sales activity this spring is happening in Sydney (+1.7%) and Melbourne (+1.6%), which led the revival in September"
Regional markets have been more resilient than their urban counterparts over the past year. Combined regional markets are up +0.1% in September and -0.1% for the quarter, for a median value of $376,903, up +2.2% on last year.
Rents and rental yields
In terms of rents, on a national level these fell -0.1% over September 2019 and -0.3% over the quarter. Rents rose in Brisbane, Adelaide and Hobart, with Sydney and Darwin posting falls over the past year. Most markets are also posting yields higher relative to a year ago, though these now appear to be stabilising or on a downward trend.
Consumer sentiment shifts
It is also interesting to track consumer sentiment as it shifts over time. In Q3 2018, national sentiment had fallen to +2.1 in September - the lowest recorded score since we began producing the Consumer Sentiment Report. This mirrors what was happening in the market, and coincides with the low point in the market.
Contributing factors at that time included the surge in new apartment developments, tighter lending criteria and a reduction in foreign buyers. Our most recent consumer sentiment report for Q2 2019, records seller sentiment rising across Australia reaching +3.6, in June 2019 - the highest national score since March 2018.
The rise in consumer sentiment is echoed by data from Australian Bureau of Statistics which reports that mortgage approvals were up 1.9 per cent for June.
"Our most recent consumer sentiment report for Q2 2019, records seller sentiment rising across Australia reaching +3.6"
Despite the very obvious risks - detailed above - that the market faces, many analysts are cautiously predicting that the downturn will bottom out during the remainder of this year and recover in 2020.
Only time will tell if this is wishful thinking, or if broader economic shocks, such as the US-China trade dispute or the political situation in Hong Kong will become an influence on the market and derail the recovery that looks to be taking shape.