Sydney and Melbourne house prices are set to bounce despite low sales numbers. These two charts show why.

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  • In Sydney and Melbourne, there are far fewer homes going to auction currently after more than a year of falling house prices. The ones that are auctioned at the moment though are selling at rates not seen since 2017.
  • That situation has led to uncertainty about where house prices might be headed in Spring when a lot more properties typically go to auction. Many commentators believe that when those extra homes come on sale, there will be a greater number of people selling than buying and prices could continue to weaken.
  • New analysis from Domain, however, shows that historically those two factors have no relationship. In other words, demand can remain high or low no matter the volume of properties for sale.
  • Domain economist Trent Wiltshire thinks that could see auctions continue to sell strongly in Spring. That in turn should see prices turnaround in Sydney and Melbourne after a multi-year slump.

Sydney and Melbourne property markets are currently in a state of flux.

Auction clearance rates — the percentage of successful auctions each week — are at their highest level since 2017 in both cities. Commentators, however, have dismissed that encouraging indicator of property demand, citing the fact that the actual number of properties on the market is much lower than normal.

Consider that over the weekend more than 70% of properties sold at auction in both cities. While an impressive success rate, if there were far fewer houses on the market, it means there were also far fewer sales and therefore there may be less appetite for property at the moment, conventional thinking goes.

Auction numbers remain well down on last year

But new analysis from property group Domain, however, has challenged that idea. According to its research, historically there’s actually been little or no correlation between clearance rates and sales numbers since 2005. That means that auction clearance rates aren’t really affected by the supply of properties for sale.

Sydney clearance rates versus auction numbers

“The auction market is highly seasonal. Auction numbers are highest in spring and autumn, with very few auctions in January. When the data is “seasonally adjusted” to account for these effects, these is a weak positive relationship between the number of auctions and the auction clearance rate in Sydney, and close to no relationship in Melbourne,” Domain economist Trent Wiltshire wrote in the new research paper.

Melbourne clearance rates and auction numbers

That’s only further reinforced when you focus on Saturday selling, the day when most Australian auctions take place, according to Wiltshire.

“Most auctions are held on a Saturday. Focusing on Saturday auction data only, there is no relationship between Saturday auction numbers and Saturday clearance rates in both Sydney and Melbourne over the 2013-19 period,” he said.

If that rings true, then high clearance rates are really good indicators of demand in the property market — regardless of the number of properties for sale at the time.

With fewer auctions typically taking place during the winter period, the oncoming high-activity spring season will again put that theory to the test. If similar clearance rates can be maintained, then prices will once again find themselves rising, according to Wiltshire.

“Clearance rates above 65 per cent typically align with moderate house price growth, and increasing buyer activity and stabilising prices point to a turnaround in the Sydney and Melbourne markets,” he said.

Given that last weekend marked the fifth-consecutive one in which clearance rates remained above 70% in both cities, both markets could really be about to turn a corner after a multi-year slump.

However, that doesn’t mean that prices will once again rise out of control.

AMP Capital chief economist Shane Oliver has previously told Business Insider Australia that the market is a very different beast this time around.

“I don’t think prices are going to run away because lending standards are a lot tighter this time around. This is not 2011/12 when banks were happy to lend to virtually anyone,” he said.

“I also think unemployment is going to rise so I think that’s also going to put a cap on prices.”

With spring auction season just a few weeks away, it will soon become clear what that long-anticipated bounce looks like.

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