The relationship between auction clearance rates and Sydney home prices, in one chart

Ruaridh Connellan / Barcroft USA via Getty Images
  • Sydney home prices fell by 3.4% in the 12 months to April, the largest annual decline since April 2009.
  • Auction clearance rates provide a useful indicator for what prices are likely to do next.
  • AMP Capital expects the recent price declines have a long way to run yet.

If you’re wondering what’s likely to happen next in Sydney house prices, you best keep an eye on auction clearance rates.

Here’s why.

Source: AMP Capital

From Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, it shows the relationship between auction clearance rates and annual changes in Sydney house prices.

As the chart shows, auction clearance rates often act as a lead indicator for annual price movements. Not always, but often.

After a brief bounce earlier this year, clearance rates in Australia’s largest and priciest city started to weaken again recently, recording the lowest preliminary reading since the start of February last week, according to data from CoreLogic.

That coincided with news that the median Sydney home price fell by 3.4% in the 12 months to April, the largest annual decline since April 2009.

With auction clearance rates starting to decline towards the lows seen late last year, at a time when lending standards are being tightened, Oliver says the recent slide in Sydney prices is likely to last for years, not months.

“APRA measures to constrain investor and interest only borrowers have worked,” he says, referring to lending restrictions that acted to slow the Sydney housing market.

These measures, combined with poor affordability, rising unit supply, falling expectations for price growth and the end of FOMO — fear of missing out — are pushing prices down.

“The latest round of tighter lending standards will add to this, as will any move to lower immigration levels and curtail negative gearing and the capital gains tax discount were there to be a change in government.”

Oliver says prices in Sydney are likely to fall 5% in both 2018 and 2019, and weaken further again in 2020.

And he says there’s a risk they could be even larger than that.

“There’s a risk of a sharper fall in prices if investors lose faith, homeowners decide to reduce high debt levels and if the shift from interest only to principle and interest for many borrowers over the next few years creates problems needs to be allowed for,” he says.

“Raising rates when prices are falling will accentuate these risks.”

In recent commentary the RBA has stated that the next move in official interest rates is likely to be up, not down, although it doesn’t see the need to adjust policy settings in the near-term.

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