The fall in turnover suggests Australian housing prices could soon start to drop

Photo by Bob Martin /Getty Images

There is a real air of caution starting to build in the high frequency economic data in Australia.

Retail sales were weaker than expected in July, Ai Group surveys of manufacturing and services both tanked in August, half the mortgagors in NSW are worrying about their ability to meet repayments and now Macquarie Wealth Management says that despite the recent uptick in auction clearance rates low turnover suggests prices are heading for a fall.

Macquarie says “high-frequency housing market indicators have historically and continue to act as strong leading indicators of dwelling price growth”.

They looked at auction clearance rates, turnover of existing stock, and auctions as a percentage of total listings to highlight their view that the market is softening.

In bigger markets like Sydney and Melbourne the “relationship between auction clearance rates (adjusted for withdrawals) and dwelling (house and unit) prices remains robust” Macquarie says with “smoothed auction clearances typically running ahead of annual price growth by approximately three months”.

But the fact that “price growth has lagged auction clearance rates” over the past 6 months as this relationship has broken down is a precursor of weakness ahead, as implied by charts from the bank.

Even with the negative divergence between the slowdown in price appreciation and auction clearance rates, Macquarie says “auction clearance rates will continue to remain a strong leading indicator given the greater share of sales transacting via auction instead of private treaty”.

But the downside of this is that “we believe the share of auctions as a clearing mechanism will likely fall from here as the heat in the market begins to decline” Macquarie says.

That means overall housing market turnover could be a more important lead indicator of where prices could be heading.

“Turnover of existing stock has declined in 2016 despite a period of solid price growth. The change in turnover has historically been a strong leading indicator of dwelling price
growth with a ~3 month lead time” Macquarie says.

That’s particularly the case for Sydney and Melbourne the Macquarie charts show.

It’s hard to look at the Macquarie charts and not conclude, based on its own evidence , that prices falls may be on the way.

But the team at Macquarie Wealth has a more sanguine outlook and isn’t expecting any catastrophe in prices.

It notes “the market remains concerned on the longevity of this upswing cycle given price growth has been tracking in line with the longer-term average for the last ~3 years”.

But it highlights that based on history prices are likely in a protracted period of slowing price appreciation.

“The duration of prior cycles has stretched to around five years, with 30 months of accelerating annual price growth, 21 months of decelerating annual price growth, before an eight month downturn, on average. History suggests that this moderation phase can take some time – nearly two years – to unfold. Indeed, we expect the back end of this cycle will be extended for some time given the persistently low interest rate environment,” Macquarie says.

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