I think most people would appreciate that the Australian property market is struggling at the moment. In most cities house prices are falling and the stock on market is high by historical standards. It seems fairly intuitive from these two observations that housing sales volumes would also be down. As I have posted on previously market turn over ( or “Churn” ) seems to be tightly coupled with house prices, but although credit data is publicly available actual sales volume data isn’t so easy to come by.
In that regard the latest newsletter from RPData has some very interesting information. It also hints that the real estate industry could be struggling a little more than it seems on the surface.
Largest fall in dwelling transactions in more than a decade
The gross value of real estate transactions fell by just over 18% over the 2010/11 financial year, the largest fall in the value of real estate sales for at least ten years.
The total value of dwelling sales over the 2010-11 financial year equated to $193.5 billion. Although this sounds impressive, the total value was the lowest over a financial year since 2008/09 and the total value fell by -18.2% from the previous financial year.
When comparing the total value of sales, houses accounted for $141.8 billion and units for almost $51.7 billion. The result shows that the total value of house sales is worth just shy of three times as much as the total value of unit sales. It is important to note that sales are only included once settled, so off-the plan sales are not included and as a result the unit statistics are likely to be subject to some upwards revision.
Looking at the annual change in the total annual value of dwelling sales versus the annual volume of dwelling sales, the graph shows that these two measures move in almost perfect unison. In fact, over the 10 years analysed, the correlation between the two is 95.2%, which shouldn’t come as a surprise. Sales volumes are currently sitting at a similar level to what was recorded during the depths of the financial crisis so it is no wonder that many property professionals are experiencing some financial challenges.
The results indicate that transaction volumes have consistently been the main driver of the total value of sales, however in more recent times the value at which properties are transacting has become just as important. This is demonstrated by the fact that the annual number of home sales is back at levels not seen since June 1997 while the total value of sales remains slightly higher than what was recorded during the depths of the GFC.
This is important for property professionals to understand. Falling home values have not historically been accompanied by such large falls in transaction volumes. Today’s market is characterised by a modest fall in home values (down 2.1% over the financial year) and more importantly, a significant decline in transaction volumes.
As reported in our Property Pulse earlier this year, state and local governments are heavily reliant on property transactions as a source of revenue. Stamp duty, council rates and land tax are calculated off either the unimproved value of the land or the value of the transaction. With the total value of sales down -18.2% over the 2010-11 financial year, there is going to be a substantial hole in state and local government budgets.
The -18.2% decline in the total value of dwelling sales nationally is the largest financial year fall recorded across the years highlighted, more severe than the downturn in 2008-09 (although the total value of residential home sales fell lower between the 12 months to October 2008 and the 12 months to May 2009 during the GFC). In each state except for New South Wales the decline (or growth) was the slowest recorded.
Given the marked decline in the total value of sales, you can expect that state and local governments will look to find other ways to raise revenue. The Queensland Government has already slashed stamp duty concessions for owner occupiers which adds approximately $6,575 in costs to purchase but is likely to provide a revenue boost for the State Government. Of course the Henry Tax Review suggests that we should look to a blanket land tax rather than relying on stamp duty. If Government was to choose this method of taxation the volume and value of transactions would have much less of a bearing on Government revenue than it currently does.
I guess that means we can look forward to more of this sort of behaviour then:
Desperate real estate agents are cold-calling people pleading for them to spruik auctions to friends and family. Agents are also using jazz bands, coffee carts and champagne to lure nervous buyers …
Editorial note: My local agent rang me this week to inform me he’d sold his car. I don’t know him from a bar of soap so it seemed a bit odd. H&H