It's taking longer for Australian units to sell -- and there's a record level of new supply on the way

Jeff Greenberg/UIG via Getty Images
  • It’s taking longer for the average Australian home to sell with sales volumes falling to a 28-year low, according to Westpac Bank.
  • The increase largely reflects lengthening times for the average unit to sell, rather than houses.
  • A record 155,275 units were under construction at the end of March, according to the ABS, with most located in New South Wales and Victoria.

Australia’s housing market has softened over the past year.

Prices have been falling for the past 10 months, led by declines in Sydney, with other indicators such as auction clearance rates, housing finance and new home sales all weaker than a year ago, largely reflecting the impact of tighter lending standards introduced by Australia’s banking regulator, APRA, in late 2014.

Sales volumes have also fallen, dropping to the lowest level in 28 years, according to analysis from Westpac Bank.

Even with a recent decline in new property listings, based off data from CoreLogic, the drop in sales volumes has seen total listings drift higher, reflecting that it is now taking longer for the average property to sell.

“New listings are tracking at just under 100,000 per month versus a historical average of 105,000 per month,” says Matthew Hassan, Senior Economist at Westpac.

“The sales to new listings ratio is sitting in the 0.20-0.21 range, well below the average of 0.24 but above cycle lows in 2011 (0.19) and 2008 (0.17).

“The implication is that sellers are pulling back, unwilling to test the thin market and not ‘forced’ by circumstance to do so.”

Westpac Bank

Based on the current pace of sales, and after seasonally adjusting the CoreLogic data, Hassan says it would take nearly five months to clear all outstanding stock for sale, above the historical average of four months but below the peak of six months in 2012.

However, that only tells half the story.

Rather than being uniform in nature, the increase in the average sale time has largely being driven by one property type in particular: units.

“The breakdown by houses and units shows a very interesting contrast,” Hassan says.

“For houses both new and total listings are running close to long run averages relative to sales. For units, however, new listings are well below average and total listings above average relative to sales.”

As seen in the chart below, the ratio of sales to new listings has fallen sharply for units since the introduction of macroprudential restrictions from APRA, contributing to a sharp increase in the average sales length over the same period.

Westpac Bank

“While that reflects the sharper drop-off in turnover across the units segment, it highlights a clear risk of a more substantial overhang of stock emerging if new listings were to rise from here. For example, if we see a rise in newly built dwellings coming on to the market,” Hassan says.

Based on recent data released by the Australian Bureau of Statistics (ABS), that looks likely to occur with a record 155,275 units under construction as at the end of March, most of them located in New South Wales and Victoria.

With sales volumes weak leading to a pickup in average sales time, this record amount of supply risks creating an even larger glut of units for the market to digest, potentially placing renewed downward pressure on prices.

And even though approvals for new high-density dwellings have fallen modestly in recent years, they still remain at elevated levels compared to historic norms.

There’s already a record supply of units being built, and there’s still a strong pipeline of stock to come should most approvals translate to starts.

It’s little wonder why so many analysts and commentators are forecasting further price declines, especially at a time when official interest rates are already at the lowest level on record.

Despite the recent reversal in home prices, and the potential for more declines to come, the Reserve Bank of Australia (RBA) doesn’t appear all that concerned at present, at least in public, noting at its August policy meeting that “prices had fallen moderately in Sydney and Melbourne, following significant growth over preceding years, while housing prices had been relatively stable in most other capital cities”.

It added that dwelling investment was “expected to remain at a high level” and that a “significant pipeline of work remained to be done”.

That suggests it remains comfortable with the outlook. It’s questionable whether unit owners would agree.

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