John McGrath – Buyers more decisive as market stabilises
While the economic climate and impact of further interest rate rises is difficult to predict, I think we are either at or approaching the bottom of this property cycle, and it looks like many buyers agree.
This month we are seeing auction clearance rates across the combined capital cities go close to 70%, according to CoreLogic data. This is significant for two reasons.
Firstly, it’s the highest clearance rate recorded over the past 12 months, symbolising a change of attitude in the market today. Secondly, a 70% clearance rate is high. A normal market operates at 60%. So, this indicates the supply/demand balance right now is robust, resulting in more sales.
Selling prices in most markets have corrected by between 10% and 15% from their peak in late 2021. At the same time, selling volumes were at least 20% lower in the Spring selling season compared with the corresponding Spring season in 2021. This is creating enough of a supply/demand balance to make the majority of buyers and sellers happy to do a deal.
It typically takes 12 to 18 months after the peak for buyers and sellers to fully adapt. The rebounding clearance rate tells us that many sellers have adjusted their expectations on price, while buyers feel the market has moderated enough for them to come off the sidelines and make purchasing decisions.
The next stage of the market will be a consolidation, featuring a plateauing of prices, followed by further upward growth in property values in 2024. This will occur across all markets – both capital cities and regions. Of course, local factors will continue to influence property prices in some areas more than others.
Popular school catchment zones are an example of this, as a great school can have a significant impact on local values. No matter what’s going on with interest rates or the economy, a new group of families will want to move into these zones every year.
New data from the Australian Bureau of Statistics indicates independent schools are growing in popularity. Over the five years to 2022, independent schools had the largest increase in enrolments (12.5%) compared to Catholic schools (3.9%) and government schools (1.9%).
In terms of the capital cities versus the regions, the regions are showing more resilience during this correction.
Since rates began rising in May last year, regional home values have fallen by an average -0.8% in the regions compared to -1.1% in the cities, according to CoreLogic figures.
The regions had a bigger boom than the cities during COVID-19. Regional home values spiked 41.6% compared to the combined cities at 25.5%.
This was largely driven by the work-from-home trend that suddenly gave people an option they never had before – to live in a lifestyle area, on a cheaper mortgage, away from their employers.
A common trend across the cities and regions is that the most desirable suburbs, which had the highest growth in home values during the pandemic boom, have also fallen the most since the peak.
CoreLogic’s new regional report shows the area with the greatest price decline over the past year is the Richmond-Tweed, or in other words, the Byron Bay area.
During COVID, house prices there skyrocketed by more than 50%, and the median house price even went beyond that of Sydney to more than $1.1 million. But over the past year, house prices have pulled back by almost 20%, providing an excellent opportunity for buyers who were priced out of the market two years ago. The median is now $885,000.
Interestingly, and as we discuss in our McGrath Report 2023, the ‘beach first’ mentality among regional buyers is shifting as many people find better value for money in Australia’s inland regions.
According to CoreLogic, that’s why the New England and North West NSW region is still recording double-digit growth – up 11.5% over the past year – because demand is still spilling over from the Richmond-Tweed.
Generally speaking, the luxury residential market has withstood the recent market headwinds better than any other market sector.
A combination of less reliance on borrowings and a supply of high net worth buyers far outweighing available listings has ensured strong prices throughout 2022 and will extend through 2023.
I anticipate the return of expats to continue, as political and economic challenges exist in many regions of the northern hemisphere.