Market Softening a Good Thing

It’s with some relief that I report early signs of a softening in the Melbourne Housing market after a rapid run, where the median house prices grew by as much as 30% in the past 12 months. Increases of such magnitude are unsustainable over an extended period of time, which can lead to bubbles forming and we all know that eventually happens to bubbles………..

Over the past couple of weeks the clearance rates have fallen below 80%, which had pretty much been the norm over the first half of this year and in the later part of last year. Part of the reasoning can be placed around the ‘affordability’ issues as a result of the recent increases in interest rates.

As I predicted, these increases are having a direct effect on the outer ring of the metro area and there are signs of increased mortgage stress at the bottom end of the market. Expect to see increase Mortgagee Sales in some of these locations and a decrease in values, if further rates rises continue. Real estate agents are reporting the heat coming out of the market. Whereas earlier this year they had reported up to 10 buyers fighting out the purchase of some properties, they are seeing less heated activity in the last couple of weeks.

Another reason behind this slow-down, and its ‘speculative’ opinion, is the decision by the government to re-introduce a tightening of the Foreign Investment laws. Last year the Federal Government relaxed laws around the purchase of existing properties, which was being speculated as artificially increasing prices due to limited stock available.

On the flip side of the argument is the volumes levels we are seeing being introduced to the market, which could be a reason for a softening of the clearance rates.

So it’s not all bad news, and it’s certainly not going to be gloom and doom that we will see appearing in the media.
Given the timely slowdown, my view is that we are not going to see a correction in values for well located inner city and middle ring properties, with the exception of high rise, high density apartments, this market could see a downturn in the near term.

My argument for a stabilisation is supported by several core fundamentals that are still present in the market going forward. We still have an undersupply of accommodation. This under supply is forecast to continue into 2012 and beyond. Combine this with continuing positive population growth for the greater Melbourne area and you have underlying demand to support values.

Areas that also show balanced affordability to income will see values continue to grow at ‘more normal’ levels in the near term. It’s inevitable that once affordability moves outside of normal range in these areas, prices will stagnate for a period of time, ‘consolidation time’, but then history tells us that they will usually provide returns consistent with their long term average growth rates.

The ebbs and flows of any market cycle are influenced by the simplicity of the supply and demand dynamics in the market. Fortunately, some rationale has returned to the market and this provides me with confidence that we will see more stable and consistent levels of growth for the foreseeable future for quality areas within the overall market.