DEUTSCHE BANK: These are the two critical numbers to watch on Sydney and Melbourne property prices

The heat is coming out of the property markets in Australia’s biggest cities.

Auction clearance rates – the numbers of houses that actually sell when they go to market – are tumbling as demand starts to moderate.

It’s what the Reserve Bank and the national banking regulator APRA want to see, having raised repeated concerns about the rises in housing prices in both cities over the past three years, especially in Sydney.

Some weekends in the searing hot property market over the past year, auction clearance rates were around 90%. In Sydney over the weekend, clearance rates were 65% and in Melbourne they were 70%.

A cause for concern?

“Hardly,” writes Deutsche Bank economist Phil O’Donaghoe in a note to clients today.

O’Donaghoe has run the numbers and argues that, historically at least, the clearance levels are still way above where they’d need to be for housing prices to start reversing.

The clearance rates he says to watch for in both markets that historically accompany a fall in prices year-on-year, are:

  • 45% for Sydney
  • 55% for Melbourne

Here’s the Sydney chart:

Here’s Donaghoe:

Some slowing should in fact be a source of comfort, and current clearance rates aren’t even close to suggesting outright falls in dwelling prices in either city. As Figure 1 shows, negative year-ended outturns for dwelling prices in Sydney have historically been associated with clearance rates around 45%. In Melbourne, the comparable figure is around 55% (Figure 2). As the charts show, current auction clearance rates are consistent with growth of around 15%yoy in both cities.

That said, softer auction clearance rates – if sustained – do suggest that the pace of dwelling price growth has almost certainly peaked in Sydney, and is probably close to peaking in Melbourne.

So we’re pretty much close to the top of price growth.

Watch those clearance rates for a sign that prices will start to move in the other direction.

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