The bell tolls for Melbourne housing

Since writing my first article in April warning of the precarious outlook facing the Melbourne housing market, Melbourne home prices have softened, falling by 2.0% in the 12 months to June according to the most recent RP Data release:

Although the median annual fall of 2.0% appears moderate in light of the huge run-up in Melbourne home prices since the beginning of 2007, the losses since the beginning of this year are much higher:

MELBOURNE’S median house price has lost more than $800 a week since the property market peaked late last year.

House prices have fallen 4.4 per cent from a December high and apartment prices are down 3.4 per cent after hitting their price ceiling in November, according to figures from property research firm RP Data.

Melbourne’s median house price hit a record $521,000 in December and has lost about $23,000, or $818 a week ever since.

The city’s median apartment price peaked at $440,000 in November and has since lost close to $15,000, or $468 a week.

And Melbourne’s home values look set to soften further, with the number of homes for sales continuing to increase steadily at the same time as sales volumes have slumped to decade lows and auction clearance rates have fallen to below GFC levels:

Now that the busy spring listing season upon us, industry representatives are encouraging vendors to lower prices in order to “meet the market” and absorb the excess supply. According to the Sunday Age’s Domain print edition (“Market not warming up just yet”, 26 August, 2011):

Warmer weather may be on its way but it will take much more for Melbourne’s property market to spring into action, with supply expected to continue to outweigh demand from cautious buyers over the next few months.

The Real Estate Institute of Victoria estimates there are almost 1800 auctions planned for the first three weeks of spring.

Although less than the 2107 auctions recorded for the same period in 2010, if current sentiment continues, the clearance rate is likely to drop further as the market attempts to soak up the supply…

In order for the increase in supply to be absorbed, vendors will have to meet the market, says Richard Wakelin from Wakelin Property Advisory…

With RP Data due to release its July home values index on Wednesday, it will be interesting to see whether Melbourne’s housing valuations confirm the above indicators and continue their downward drift.

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Comments

  1. Yet some people seem to be blissfully ignorant of all the above. I sit next to a young lady at my current job whose partner is getting them into their third investment property and she’s been talking about how rich they’ll be in another ten years… She’s so young though (at least in comparison to me!), I keep forgetting that they have never seen a contracting market before.

    I really doubt that we’ll see a Dublin-style implosion here but a much more likely scenario is a slow, long deflate (like in New Zealand and many US states). Either situation will be terrible for small time investors but then again that risk was always present, its just that we haven’t had an actual substantial decline in the market since Bob Hawke was PM.

    • Same here, it is so blatently obvious to me what is going on that it is always a surprise to hear someone rave about housing.

      And then it’s shocking to see how many people still think that way!

    • Uni student here, about 5 friends my age 21-25 have saved a sizable amount of cash and are having help from their baby boomer parents to buy an “investment” property while they live at home as a KIPPER.

      They all tell me the same thing, Im going to keep it forever and use it to leverage and buy more…

      Whats the point in servicing a loan during your prime years of your life to live supposedly better off in your retirement which wont be till your 70-75 in 50 years time. I guess its a lifestyle as much as a financial choice.

      Well that’s my opinion.

      • im in that bracket, im saving approx 85% of my salary a week living at home, and its not going towards investment property. Most of my mates are realistic and arent evening thinking about ownership for around a decade, either due to living cost pressures or aware of the demographic and other economic pressures we have on the property market..

        I dont envision the boomer generation all getting out at the top unscathed..

        Why do financial companies have to say “past performance does not indicate future gains” (or close to it) yet no requirement of the spruiker industry?

  2. I was told recently (3 weeks ago) that my landlord made a snap decision to sell. The agents pinned 24 Sept as auction day.

    Well I haven’t heard a thing from them yet. No inspection, no photos, no sign out front. No word of rent reduction.

    The initial conversation with the agent went along the lines of him saying if it doesn’t sell at auction its because her expectations are too high and in the event its passed in and reverts to private sale they won’t putting in any effort to sell it. He candidly stated his job is to lower her expectations (20%+ on recent comparable sales).

    Landlord has a history of jerking the agent (and me) around.

    I reckon its nothing more than a token effort and the agent is not keen to waste their efforts for no return. Whereas they’re still getting their bread and butter property management fees while the place is tenanted.

    Melbourne has a long way to go before it represents fair value. ZIRP may be the only thing that saves it.

    • I know quite a few people that had to move because of investors selling property. I think the rental market definitely boosted when number of sales transactions high as tenants must look for a new place. Hopefully this is about to change with slowing market.

  3. I went to an Auction on Saturday in my street in North Melbourne – right near the CBD. It was a 2 bedroom unit, and passed in at Auction without a single bid. No one even looked interested at the property at all. The reserve was $420k (a similar one sold in a complex next door last year for $485k) and the initial vendor bid was $380k, wanting $390k as the next bid. No one presented the next bid, so auction passes in.

    Interestingly, by the end of yesterday – there was a ‘sold’ sticker on the front of it. I dare say that the vendor was desperate to sell, and the person purchasing must have bought at a price of nearly 70-90k then a similar property last year.

    On this property that is 20% down on the results from last year.

    Many of the other properties in my local area that are passing in, are simply being put “For Lease” again. But I think there is the occasional vendor that needs to get out at all cost – and these ones are selling at a considerable discount to last years prices.

    • It’s OK, people are just nervous about hurricane Irene. Once that’s blown over….. πŸ™‚

        • It rained in Brisbane last Saturday. Therefore auction results will be down and because auction results are a leading indicator of the market we can blame last Saturday’s rain for the next month of poor sales in South East QLD.

          • I heard it was the carbon tax keeping buyers away.

            But they’re just about to jump back in and start picking up bargains.

          • “Property prices double every 10 years and if there is a decline I’ll buy a bunch because you NEVER lose with property mate”

            *rolls eyes*

  4. Interesting to see the MSM’s response to the slide. The Herald Sun has seemingly ditched its resident bull Craig Binnie and rolled out the bearish John Dagge. I can’t help but think the REIV has a huge part to play in this, as a mass vendor conditioning strategy. His articles over the past two weeks have been seriously bearish and borderline panic stations. A journalistic mercenary!

    When you get a chance UE, check out postcode 3030 (Point Cook/Werribee) as a FHB territory bellwether. Very ugly indeed, with over 3000 listings compared to the 800 or so at the commencement of the last bloodbath in 2008 (prior to the boost).

    • It is such a massive increase in listings.

      I sold my house in Point Cook in January for about 30k less than I would have got if I sold in October.

      But now I can get larger houses, in a better location with better fittings (cbus lighting, etc) for the same price I sold my basic 4 bedder for…

      Prices are already down.

      • MHP’s in WA are terribly misleading, during the boom years we seriously built out the rural urban fringe… Now we have areas like Byford with over 1000 listings of land and houses combined – there aint no property shortage. These houses have price tags of between $370-600k and they were getting snapped up in the boom, now only 1 has transacted in the last 6 months!

        Times are tough living on the fringe! All the husbands are FIFO workers who drive SS’s and even HSV’s, they’ve got jet ski’s on trailers and they are all levered to the gills! What happens to them and their home prices if China flicks us off her coat tails!?!

  5. Leith,

    with the 2% fall now baked in and icing on top and Tax Returns being completed/filed … do you think that we may now see a faster deleveraging and an increase in the housing prices ‘softening’ as Speculators (oops sorry investors) attempt to pull out of the market?

    Also, we are close to the Spring selling season… if ever there was a time for a Government Package this might be it … if not how much more stock do you think Melbourne will end up with by Summer? (100% increase Y/Y)

    I think we could yet hear apologies all round for Steve Keen… to me this looks like the perfect storm for a “Minsky Moment” – mass capitulation if there is a massive oversupply and no momentum left in debt with Sales…

    What a year 2011 has been … to quote the Red Hot Chilli Peppers… “Rollercoaster!” it may well be a vertical drop from here!

    Thank you for your article.

    TM.

    • The people that believe in a massive crash, rather than a gradual softening have always based this on a belief that we would have an explosion of listings at some points (usually when denial no longer works and panic genuinely sets in).

      We are very close to approaching that point in most cities. Holding onto your second or third property at the moment is stupidity and they will realise this soon

    • TM,

      Steve has an item on BS today.

      So far the first few comments constitute a bit of a slag on his credibility – not sure if it’s orchestrated or not.

      Funny, ’cause whenever Joye puts up one of his “we’ll all get rich from houses” items, he generally gets massacred in the comments section as well.

      They must each have their own “anti-fan” club πŸ™‚

      Wouldn’t hold your breath for the apology though.

      • Touche – I think you may be correct about fan clubs.

        Though I don’t read ‘The Joye of Housing’ as I have formed a position which I am comfortable with more Bear… than Speculator.

        I think reading Joye would just twist my non-financial melon in the wrong direction!

        πŸ˜‰

  6. We live in 3185 (Elsternwick), kids at school 3186- Brighton ( public primary, private secondary). Both are reasonably affluent areas.
    1. Housing
    – large stock of houses/units on market.
    – many open for inspections drawing zero attendees.
    – many auctions having no genuine bids ( vendor bidder only).
    – a number of houses sold, but coming back onto the market, as people duck settlement.
    – friends did a mini devt- thought it would sell for around 800,000, advertised for 720,000, sold for 679,000.
    The agent said they did well, which speaks volumes.

    2. Local retail dead, and empty shops in Church street and Glenhuntley road for the first time in my 15 years of living here. Haven’t bought anything that wasn’t on sale for months, best discount found was 85%. 70% discount routine.

    3.Many mothers back in workforce, to help pay mortgage ( often huge), meaning large numbers in afterschool care, and that combined with tight cash meaning many after school private sports clinics being cancelled due to lack of kids. Same for music lessons etc. AMEB ( music exam organization) noted a large fall in exam entries, as parents find instrument lessons too expensive.

    4. Private schools seeing a bleed of children as paying school fees too much, and many families hanging in by their fingernails. ( from a school administator)

    5. Comment on boomers;
    – I think there may be a flood of boomer large family dwellings hit the market this spring ( let alone investment property as they retire).At a recent group I attended of 20 women, 4 were planning to sell large houses in Malvern etc in spring, and 1 had sold for a 20% reduction earlier this year – all of them feel financially underprepared for retirement, having spent a lot of cash along the way living well and travelling a lot, and had depended on downsizing to give their retirements a much needed cash injection.( Let alone pay off the mortgage).
    – Many boomers I know have backed into their house equity to either;
    help their children enter the housing market
    paying all or part of private school fees for grandchildren.
    I suspect more boomers have a mortgage to pay off than many people realize.
    I find it hard to believe we will not see what has happened in the Statesand I think it may be very ugly.This is a house of cards waiting to fall, and will threaten the banks that have financed it.

    • Thanks js. That’s a good summary. I live in Brighton and can confirm most of your observations. Retail continues to divide into two camps: very cheap or very expensive.

      Yet to see large reductions in asking prices, so capitulation has not arrived yet.

      I am keeping an eye on used car listings as another metric, particularly the Brighton standard, BMW X5.

      Currently 67 listings for 2007 or newer model, within 10km of postcode 3186.

      http://www.carsales.com.au/all-cars/results.aspx?tabID=304727&YearFromShort=1651&postcode=3186&keywords=&SearchAction=N&N=1216%201246%201247%201252%201282%204294967079%204294729577%204294966834%201651&sid=12C5A129A2F0&Nf=p_GeoLocation_String|GCLT+-37.90833,144.9959+10.0&Nne=15&tsrc=allcarhome&distance=10&Ns=pCar_PriceSort_Decimal|1||pCar_RankSort_Int32|1||pCar_Make_String|0||pCar_Model_String|0&Qpb=1

      I didn’t track the number post-GFC, but saw a noticeable increase in the number of these cars for sale.

      • Another symptom: people cancelling Private Health Insurance contracts. The load on the public system will increase.

        There was even a certain amount of “private” treatment being paid for with housing equity withdrawals. Many, many sectors will be affected by the end of this little game.

      • “I am keeping an eye on used car listings as another metric, particularly the Brighton standard, BMW X5.”

        Thats exactly what I am thinking. The past 15 yrs of House inflation wealth created new categories of consumption. Put all those together as a “stock index” and you can chart a mirror rollback as spending goes back to normal patterns.

        Heres my index:
        Ford Australia (Territory sales)
        Coca-Cola Amatil Ltd (34% OZ bottled water)
        Dayspas (seach results for “Daylesford” and “discount”)
        Jims Mowing (Franchise price)

    • My wife is a secondary teacher and confirms you’re point (4); her school can’t meet the demand from pre private students.

    • Re point 4 on private schools:

      Some schools are carrying huge debt levels; having been rather cavalier in their building sprees. I hope that their board members are taking note because they could be on the chopping block.
      I’ve been told that the UK is experiencing a contraction of private schools as middle tier ones are folding.

  7. http://www.theage.com.au/business/hot-bargains-in-ski-market-20110828-1jgnj.html

    See above story of fire-sale of properties at Falls Creek.

    Classic comments:

    Mr Schwartz said he was ”very happy” with the results.
    ”I think that all we did was we brought a lot of people in and we established the market price.
    ”And that’s the real price up there, that’s the value,” he said.

    Can you imagine how happy other property owners are to find out what the “real price” is “up there”?….

    • Yeah, I read the following lines this morning and thought… WTF?

      “Mr Schwartz and his business partner Callum Fraser sold 74 apartments and three retail spaces for $12.8 million”

      “Mr Schwartz and Mr Fraser developed the three Falls Creek resorts St Falls, Huski and Silverski between 2005 and 2009 at a total cost of $100 million.”

      “Mr Schwartz said he was ”very happy” with the results.”

      Ok… So Cost $100 Million to develop, Sold for $12.8 Million.

      That sound like one hell of a haircut to me… Mr Schwartz has deeper pockets than me.

    • That is just unbelievable. The glass is half full, but if you look close enough it’s over-flowing. Delusional!

  8. Leith,
    I’m not sure if anyone has asked this question before, but given your bearish view on housing, what is your target for the median house price? How far do house prices have to fall? What would house prices do if interest rates fall substantially? Have you considered this in your forecast?

    I have been to the U.S. and Europe in recent times and noticed that for a comparable quality house on a comparable size block, located close to the central business district, houe prices in Australia were very similar to that in some of the places I visited. Only my observation though….the median house in the U.S. simply does not stack up to the median house in Australia on all metrics considered important…size, quality, location.

    • BK, you’ll need to provide more info there.

      I lived in the US for a few years and generally housing there is of a better standard, and the blocks are far bigger. Its also a lot cheaper, even at pre-GFC prices. You’re right that Aus housing doesnt stand comparison to it.

      • Likewise. It’s not apples vs apples comparison, but of the three US cities I’ve lived in the energy efficiency is well beyond what we have in Australia. Likewise where I lived in the UK. Germany, Sweden, Norway etc. are much better eco wise. The US blocks that I had were bigger, but UK smaller (about 2/3rd my current one in Melbourne). It’s hard to compare, but on the eco level we’re way behind. Price wise we’re more expensive…my UK house 4bed 2bath detached sold for $462,000 Fx Rate 1.6 (It would now be about $400,00 at today’s prices – house age 21 years). It was in a very good village as well. That house here (May last year timeline) would have been about 700/800K I’d expect.

      • Are you trying to say the ‘median’ house in the U.S. is of a higher standard than the ‘median’ house in Australia?

        • Yes, thats what I’m saying. And considerably cheaper too.

          Now its very difficult to select similar areas so a comparison is in most cases meaningless.

          But standards of workmanship and materials are on the whole higher, simply because labour and materials are cheaper.

          Block sizes are way bigger as well. 1/4 acre is the standard in the US generally, and in many places its 1 acre.

        • BK, regardless of what real estate agents would like to have you believe the quality of Aussie housing is generally pretty substandard compared to housing in Europe or the US, especially when you compare them to the new developments which are generally build on tiny lots with builders trying to keep them less unaffordable by saving on construction material.

          • EXACTLY.

            Builders in the USA are not desperately trying to compensate for the fact that the “lot” alone is already higher in price than what people historically could afford.

            The exception is of course, cities in the USA where they DO have “smart growth”. These cities caused the whole bubble and crash in the USA. The USA is actually fundamentally sounder than many other countries because the USA had so many cities WITHOUT “smart growth” and price bubbles. Expect the mess to be much worse in countries where EVERY city was growth controlled and bubbled.

        • Based on my experiences new US houses are of a much higher standard than new Australian houses.

          Have you been to Glenwood/Kellyville/Rouse Hills in NW Sydney? The shoddy build quality of houses there is appalling.

          • Maybe they would get away with shoddy housing in Europe and The US if their winters weren’t so cold.

          • ali s,

            A 20 degree difference in temperature compared to the standard comfortable 20 degrees C is still a 20 degree difference. Doesn’t matter whether it’s up or down.

            Heating or cooling, both need proper insulation to be energy efficient… It’s like arguing beer will stay cold in a carton box. I prefer the Eski thankyouverymuch. πŸ˜›

            I can tell you there really is a big difference in comfort (many European migrants I talk to confirm this). I’ve never been as cold as I’ve been sitting at home in South Australian winters!

            Furthermore, Aussie construction is not as durable and definitely not sound proof. Mom and dad have to play silently I guess… πŸ˜›

    • I’m from New York City and living in Melbourne for almost 3 years now. If anything, I have observed the exact opposite. Melbourne is absurdly overpriced. Bad enough in fact that I have to consider moving my family back to the US.

  9. Devilled Advocate

    BK – its hard to say and depends on quite a few factors IMHO – we were ready to buy in North Balwyn late last year and happy to spend 1.2 – 1.4m

    You can now take around 200 – 300K off those prices now – which is a 15-20% haircut at least in less than 9 months….

    Having said that its a unique area which a very high % of BB’s many of whom are starting to liquidate thier main super asset.

    As the Coles add says prices are down and staying down…

    Very glad I found this site before buying a massive lemon. As it stands today I could buy an infinitely better house for the same money and the same house for 200 – 300K less.

    DA

  10. I think the disaster that was Channel Nine’s ‘The Block’ is clear evidence the Melbourne market is dead as a dodo. I wrote about this in my blog last week.

    Real Estate in Crisis – The Block Auction Results 2011

    Naturally Channel Nine would have profited through advertising and sponsorship during The Block series, but the dismal auction results and sale price reveal a property market in crisis. Unknowingly Channel Nine may have pulled the trigger on the bursting of the bubbliest city in the bubbliest housing market in the world.

    Melbourne’s property market was in a poor state prior to the disastrous Block finale, with low auction clearance rates, falling prices, and a large overhang of stock (plus much more in the construction pipeline), but there’s little doubt the negative publicity provided by The Block will have cemented a truly alarming picture in the minds of most Melbourne homeowners and property investors.

    Tony.

    • But it seems that they are going to make another series of The Block? (Can’t remember where I read that last week, or was I dreaming?)

      Perhaps they could re-mame it “The Chopping Block”?

      • First rule of making TV if it works make it, make it, make it, to death.

        Till it fails then do the ooposite.

        How to save/sell your house in a deprreessed market.

        πŸ˜‰

        TM.

  11. According to RP Data sales listings in Victoria have jumped from 50,233 on 7/8/11 to 57,139 on 21/8/11 – that’s a 13.7% surge in a fortnight, with sales listings up 42.9% from a year ago. I can’t see any way that demand follows suit, let alone prices.

    • That’s extraordinary.

      Do you happen to have similar stats for Sydney? APM are reporting a drop of 1.1% for July Quarter, which I’ve estimated to be around 1.5-2% for the month. If a similar jump in listings happens in Sydney, then August might see another big drop. At the moment, Sydney seems to be the only thing supporting people’s confidence in housing. As long as Sydney doesn’t fall, then there is still hope of a recovery, and no US-style implosion.

      • Living in Sydney I am desperate for a crash so I can dream of having the privilege of getting a run down hovel 80 km from where I work. Unfortunately Sydney has managed to look fairly stable so it is great new if it looks like a drop is coming.

      • NOT A ''TRUE BELIEVER''

        Many parts of Sydney have the same problems as the rest of Aussie. Check out www. refindhouseprices.com.au to see thousands of discounted properties sitting there fo months on end !

      • Listings are up 9% over the last fortnight nationally (to exceed their previous high)- I don’t have the NSW numbers on me but they’re leading the way with VIC. Usually listings jump after the January holiday period, and again in the middle to late Spring. What’s happened in the last 2 weeks that might be causing this flight to sell property? Stock market goes bananas / predictions on sharp interest rate cuts / falling house prices / threats of a federal election?

        Spring selling season has come early, but that doesn’t mean demand will follow suit. Current listing levels are already putting downward pressure on prices – even more new stock will just exacerbate that.

    • Do you have RP Data stats for WA? I’d appreciate any August numbers for Perth or WA that anyone has handy. I do note from BurbWatch that Perth listings have dropped in August, and I wonder if RP Data agrees. Will be more telling what happens in September though, and whether there’s a surge in listings for spring.

  12. @ AxelF

    “According to RP Data sales listings in Victoria have jumped from 50,233 on 7/8/11 to 57,139 on 21/8/11 – that’s a 13.7% surge in a fortnight, with sales listings up 42.9% from a year ago. I can’t see any way that demand follows suit, let alone prices”

    http://www.rba.gov.au/statistics/frequency/fin-agg/2011/fin-agg-0611.html

    Quantity of DWELLINGS for sale UP 42.9%

    Quantity of MONEY to buy the DWELLINGS UP 5 – 6%

    The outcome for DWELLING prices… obvious

  13. The quality of many recent Australian homes is of an appalling standard. The box shaped ugly “modern” houses have seen time honored building principles like large eaves and well pitched roofs thrown out the window. Instead “el cheapo” materials like blueboard, polystyrene, lightweight concrete blocks al covered by a thin veneer of acrylic render now dominate. Look closely at a lot of these overpriced heaps of rubbish and you will see cracks appearing, acrylic render peeling off, water staining from unguttered balconies, water penetration into joints that are opening up, etc etc Many of them will incur major maintenance costs and are already looking old and shabby. Buyer beware.

    • Totally with you there Pedro, I can’t believe people pay the money they do for such poor quality builds. Getting a sore neck from shaking my head at the stupidity!

      • Not to mention most of them are built on minuscule sections in the middle of nowhere without any public transport or amenities within walking distance. People would be better off buying an apartment near the city as although you still wouldn’t have a backyard at least the commute would be shorter.

  14. I went to a seminar on Property Investment Through a SMSF run by a prominent Super Advisory Firm. Well I only stayed for 15 minutes as it was obviously a con job to suck you into using their presumably overpriced property services.
    Firstly the speaker highlighted the huge unfulfilled demand for residential property in Australia fueled by continuing massive population growth(maybe I misheard him and he was talking about Austria or somewhere else!) Well I don’t know where he gets his stats from but where I live in Melbourne there is a huge surplus of propertys that can’t be sold with auction rates at all time lows not to mention the latest massive fall in new home starts. Then his shows some examples of cash flows for negatively geared property conveniently stopping at 2009 with fantastic capital growth. Next he pops a chart on the screen showing projected housing growth figures from BS Shrapnel with figures like SUNSHINE COAST +13% for 2012! Well that region in particular is so oversupplied with residential property which no one wants that I nearly cracked up laughing. I would have liked to have stayed around and asked some questions like “Why would you negatively gear when property prices are falling and likely to worsen as people unwind their loss making negatively geared propertys to reduce their capital losses?” However I had a good laugh and there is only so much rubbish I will tolerate so I walked out.

  15. I have just sold my house out at 515K at Mulgrave. a very quick sale — 3 weeks on market. price is down about 6% compare to peak time in last year Oct to Decemmber. there are some buyers there but most of offers are under 500k. I believe I can ask at least 10k more if i could be more patient.

    My conclusion: affordable area still is OK even the price is slowly sliding.