A Mean Reversion ?

After the expected slow start to the spring market thanks to the drawn-out Federal election outcome, football finals turmoil and unpredictable weather, there have been plenty of listings this spring.

Listing volumes have lifted between 20 to 30 per cent on last year (Sydney and Melbourne) and by 50 per cent in Queensland and Perth. This is a good thing for Australians venturing out to find a new home but has of course resulted in a softening of auction clearance rates, which have returned to more ‘normal’ levels after highs in some capitals of around 85 per cent.

Sydney and Melbourne saw average clearance rates of 51.7 and 54.8 respectively last weekend, although First National fared better with Corporate Auctioneer Michael McCaffery reporting a spike at 69 per cent. Nonetheless, the general downward trend since April has not escaped the notice of those with short memories and, predictably, stories of a property bubble have again emerged from the wings.

Forgetting of course the remarkable performance of the Australian property market throughout the GFC, that auction clearance rates above 70 per cent are the exception rather than the norm, and that property prices rose by 50-60 per cent in three to four years in the early part of this rapidly closing decade, some suggest we have an elephant in the room – the elephant being the prospect of a sudden and dramatic drop in prices.

The property market is by nature cyclical and what First National Real Estate currently observes is a return to a more normal set of circumstances. Although the market would prefer to see clearance rates in the 60 to 70 per cent range, it’s not necessarily a bad thing or a sign of impending doom if they drop into the fifties as they did last weekend. It’s just a normal outcome to an abnormal spring supply.

After all, stability is what the market searches for and with all that instability in the lead up to spring, it’s hardly surprising that many people contemplating the sale of their home held off just that bit longer than usual as they waited for electoral, sporting and meteorological certainty to return. It might sound silly, but these are amongst the many things that affect decision making.

While listings have spiked, sales are ticking over and outside of Melbourne, Canberra and Sydney, auctions account for less than 15 per cent of total listings. So, should there be concern about the current market softness shown in auction clearance rates?

Australian’s rightly expect Treasury officials to test and debate policy within the department as a normal process of government, but should such discussions be exposed in national media? Internal memos obtained under Freedom of Information laws and published in last weekend’s The Australian put a potentially alarming slant on the property bubble debate, given the choice of language used by the officials concerned. However, their communications were part of the kind of robust internal debate we would expect in the corridors of power – the kind of argy-bargy that leads to the proper development of enlightened policy. However, such communications published in isolation risk causing alarm.

Reliable economists and property market commentators tend to take very long-term views. They believe in things like ‘reversion to the mean’. This is the rule that there is an average level for assets and that prices will fall to or recover to the long-term mean trend.

While it’s true that Australian house prices sit roughly 25 per cent above the OECD average, our high level of immigration, local government bottlenecks to building, recent subsidies for new home buyers and scarcity of land for development where anybody wants to live, all contribute to our prices representing a normal, relatively sustainable position.

Naturally, rising interest rates will erode affordability and possibly cause an ongoing situation where auction clearance rates won’t rise significantly for some time. But then fewer Australians will list homes for auction or for sale as a result and fundamental market buoyancy will be maintained.

The current picture is one where borrowing for housing is broadly growing in line with income, house prices are stable and there is little appetite for other forms of debt. The latest Australian Bureau of Statistics figures show prices rose just 0.1 per cent overall in the September quarter (and fell in all capital cities except Melbourne, Perth and Darwin) but, significantly, they remain 11.5 per cent higher over the past year.

A slowing of household debt lessens risk in the economy and with clearance rates at long-term averages, we’re seeing prices heading in the direction of the ‘mean’ in some areas and equilibrium being restored between buyers and sellers.