Interpac Business and Migration Solutions Melbourne Australia

(November 21, 2011)

Australia's residential property market is headed for its worst year since the global financial crisis as growing economic uncertainty deters buyers.

Melbourne may post the gloomiest results for 2011 among the major cities, with the clearance rate at auctions on course to fall to levels not seen since 2004, according to data from the Real Estate Institute of Victoria.

The REIV predicts Melbourne's auction clearance rate to average about 57 per cent for 2011, once the final weekends of the year are included. That's down from a 71 per cent rate last year.

Not all blue sky for the housing market. Photo: Rob Homer

In Sydney, the clearance rates were 52.4 per cent last weekend, down from 55.1 per cent the previous weekend, Fairfax-owned Australian Property Monitors data show. Barring a surge in buying in the first part of December, clearance rates for 2011 are on track to average 54 per cent, the weakest since 2008, APM data show.

The housing market is both a reflection of the health of the economy and a key contributor to it. Australian property prices have stagnated or fallen over the past year as first higher interest rates and then worries about the state of the global economy sapped buying interest.

So far, Australian home prices have avoided the sharp reversals experienced in much of the developed world, particularly in the US, UK and Ireland, and remain among the highest anywhere. The country's relatively low unemployment rate and rising population have combined to stem any major retreat, and the Reserve Bank has scope to cut its key cash rate again from 4.5 per cent if the economy slows further.

“For most of this year everyone was on the understanding rates were going up not down,” said Real Estate Institute of Victoria research manager Robert Larocca. “That combined with concerns about the international economy caused a lot of people to not be bidding strongly at auction."

Slowdown

The national clearance rate in 2011 is 48.3 per cent, compared with 60.9 per cent in 2010 and 69.9 per cent in 2009, RP Data said. That annual average, though, masks some slowdown in the second half of 2011. Over the past weekend, the national clearance rate rose to 46.5 per cent from 44.2 per cent, after hitting a low of 39.5 per cent on the weekend of October 2 - a nadir in the survey's four-year history.

The measure has been under 50 per cent for the past 19 weeks, as buyers struggle with low affordability, increased uncertainty about the health of the economy, and the lingering effects of a year in which most RBA-watchers forecast rate rises to come.

"When you look at clearance rates below 50 per cent for so long you have to ask why are people still taking their property to auction?" said RP Data head of research Tim Lawless.

Real estate auctions, while used around Australia, dominate as a share of housing transactions in Melbourne, and to a lesser extent, Sydney. Typically, rising clearance rates track rising home prices and give a good indication of overall market demand for housing.

In Melbourne, auction clearance rates rose to 53 per cent this weekend, according to the REIV, compared with 51 per cent last weekend, revised down from an originally reported 54 per cent. REIV calculates clearance results on a Saturday and then updates them on Sunday and Wednesday.

'Soft' market

Real estate agents and vendors are now deploying the auction process as a way to market their property to the public and attract potential buyers who they will negotiate with privately, said Mr Lawless.

Auction rates are not the only sign of weakness in the housing market. Home prices, for instance, sank for the ninth consecutive month in September, easing by 0.2 per cent, from a 0.4 per cent drop in August, according to RP Data-Rismark. The median house price nationwide in the month was $450,000.

“It's definitely a soft auction market," said Westpac senior economist Matthew Hassan, who added that clearance rates are stabilising at the current levels. “The expectation of price gains are certainly not there at the moment,” he said.

Mr Hassan described 2011's price falls as similar to those seen in 2008 around the time of the financial crisis, although the interest rate response has been much more subtle, he said.

Expectations about future interest rates changed in August, after the sovereign debt crisis in Europe and the US accelerated. Those worries prompted the Reserve Bank to cut rates this month for the first time since April 2009, and investor continue to price in another cut when the RBA next meets to set interest rates on December 6.