- Australian auction clearance rates have risen in early 2019, having hit record-low levels late last year.
- In the past, clearance rates have been a good lead indicator for house price movements, leading some to speculate whether recent declines may soon slow or stop.
- J.P. Morgan isn’t convinced that will eventuate, suggesting that prices will “remain under pressure in 2019”.
Auction clearance rates in Australia have risen in early 2019, leading some to speculate whether home price declines may soon slow or even stop, given the historic relationship between the two.
However, while that may fill some with confidence that the downturn in prices is nearing its end, Tom Kennedy, Economist at J.P Morgan, remains unconvinced at this point.
His view is based on three factors.
The first, that March is traditionally a seasonally strong month for clearance rates. Secondly, even with the recent improvement, national rates are still significantly lower than in prior years and, thirdly, the recent pickup likely reflects more realistic price expectations from vendors given tepid demand, tighter lending standards and a strong pipeline of new housing supply still to be completed.
“The pro-cyclical nature of clearance volumes and prices means that in recent years annual house price growth has maintained a strong correlation with the percentage point changed in annual clearance rates,’ Kennedy said, pointing to the chart below that shows national clearance rates overlaid against annual price movements.
“At first pass the relationship indicates that the decline in house prices is overdone and poised to stabilise or turn higher in coming months. We would caution against this interpretation given the wedge that has emerged between clearance rates and price growth is likely related to vendor discounting as sellers adjust expectations.”
Given that assessment, rather than forecasting that price falls will slow or stop based on the recent signals from clearance rates, Kennedy says that prices will likely remain under pressure this year.
“With the dwelling construction pipeline still elevated and housing credit growth slowing, our expectation is for current dynamics to persist and for house price growth to remain under pressure in 2019,” he say.
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