Property is about to go “no bid”

Via CoreLogic:

There are 2,422 capital city homes set to be auctioned this week, up from the 2,274 auctions held last week.  Over the same week one year ago, volumes were lower (1,667).
Both Melbourne and Sydney are set to see an increase in the number of homes taken to auction week-on-week, with Melbourne set to host 1,215 auctions, up only 1.2% on last week (1,201).  In Sydney, 907 auctions are scheduled to take place; an expected rise of 18.3% over the week (767).

Across the smaller auction markets, volumes are set to be higher over the week in Brisbane (109), Canberra (77) and Perth (36). While Adelaide (69) and Tasmania (9) will see fewer homes auctioned this week.

What if we held an auction and nobody came? It would never be reported:

While the coronavirus takes global stock markets for a wild ride, it’s left Australia’s sacred cow, its beloved property market, well enough alone.

Take auction clearance rates, one of the market’s leading indicators, for example. Over the weekend they showed the first signs of softening, although haven’t fallen significantly yet.

“The impact so far has been pretty muted. Clearance rates have been down a touch but they’ll still be pretty solid numbers when they’re finalised later this week, probably ending up around 70% in Sydney and 65% in Melbourne,” Domain economist Trent Wiltshire told Business Insider Australia.

“There are fewer people at inspections but it doesn’t seem like the news has flowed through to the property market although there is some risk to the short-term outlook.”

AMP Capital chief economist Shane Oliver has warned capital city clearance rates are certainly headed south.

…“But if contained, things will rebound quite quickly, and that goes for the property market as well.”

We interrupt this program to inject a little reality.

Our best guess is the shut down will run through October as the first virus wave unleashed by ScoMo containment failure hits and is beaten back. Then a second wave arrives with Winter and can’t be beaten.

Realty about to go “no bid” for six months, opening the possibility of a massive price gap. Martin North sums it well:

Despite the property bulls (who seem to be a bit quiet just now) there are a series of logical reasons why prices will indeed fall from current levels.

First net migration into Australia will stop period. We have been seeing around 300,000 each year, which was one factor supporting demand in some areas.

Second, new property transactions will stall. No one will want to attend an open house, yet alone an auction in the current conditions. Sales transactions have risen more recently, by that just got turned off. How soon will it be before we see zero auctions reported on a Saturday?

Third, property investors, will continue to flee – they already saw rental returns dropping, now no capital growth. Demand from new investors was weak, it will die. They may have to subsidise renters who cannot play rent due to job loss or income decline.

Fourth, existing mortgage holders will face cash flow issues as income stalls. We already have more than 1 million households in cash flow stress, another 200,000 or so are set to join them, in short order. Around one quarter of households have less than one months free cash available if incomes stall.

Fifth, banks will (are) cut back on mortgage lending. With margins already low, experience from Europe suggests it is unprofitable to lend. They will also lift risk underwriting standards. Meaning people if they want to borrow will get a lower available loan. Loan books will likely contain more defaults and higher risks – meaning more capital. Some may choose to shrink their balance sheets as liquidity stalls. Recently first time buyers were getting $420,000 mortgages no problems, with income ratios of 6, 7, 8 times or more. Debt servicing ratios are still high – and servicing is now an issue.

Income multiples often assumes double incomes. If one income stopped that would be a big problem.

Sixth, forced sales will eventually occur though nor immediately. I expect banks to support households in financial stress by loan and interest payment postponements, for a time. But eventually forced sales, at lower than current market values will follow. In addition, given the death rates among older people, more supply could well come on stream as estates are liquidated.

Seventh, States will take a hit from falling stamp duty as transactions slow. They will not be able to reverse this.

Eighth, Government will try various stimulation moved to try to prop up the market – but persuading people to buy now will be like selling seawater on the beach. They may well provide cash support direct to households for mortgage and rent payments – they probably should.

Ninth – the property wealth effect, which was a mirage, is dead. Finally. Until the next bubble starts, which it will, unless policy changes. I will have more to say about that ahead.

Finally, its worth thinking about this. On average, prices are 40% over their fundamental value. So they have a long way to fall.

And debt to GDP ratios are, and will go further off the charts.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. When unemployment hits 10% and no flights bringing in specufestors, hopefully the market finally falls 50% and housing becomes affordable again. I’m tired of apartment living.

    • 50% , they are still expensive. Need to drop 70% To be “affordable”. Hopefully 🤞🏿

    • The RBA have just started QE. In Japan the BoJ doesn’t only buy bonds, they buy shares.

      In Australia I expect the RBA to use newly printed money to buy houses: QRE Quantitative Real Estate
      This will keep house prices from falling.

      The could also call it PIMP Property Investor Market Priming.

    • 10% unemployment is so optimistic, if only half of construction workers lose jobs unemployment will hit 10%
      what about tourism, hotels, restaurants, retail, …

      -70% is base case, some suburbs more

    • Tassie TomMEMBER

      dj you might be able to move into the established home of an elderly Coronavirus victim in the next few months.

      Great point by Marcus North that I hadn’t considered: Not will there only be reduced demand due to no immigration, but there will also be increased supply due to all the upcoming newly vacant deceased estates.

  2. If you sold last week at auction you might get lucky and the sale falls through and you keep the deposit.

    • You’d enforce the contract; keep the deposit in the meantime and sue for the difference between what the contract price agreed was, and the market value at disposal.
      ie: Possibly much more than just the deposit money coming your way.

  3. keynesian Killa

    lol, shutdown till October? There won’t be any economy left by then.
    No Bid on property will be the least of anyones worries

  4. TailorTrashMEMBER

    The only good thing to come out of this bat bug thing and it’s hardships would be a big correction in house prices . Yes it would unravel investor parasites ( how sad for all those mum and dads trying to get ahead ) but it would do much social good
    ……one can only hope amid all the destruction it happens .

    • Goldstandard1MEMBER

      How about the other BIG important thing that should come from this global pandemic?

      The realisation that too much debt puts all people and business at risk, and local manufacturing should always maintain a base case threshold.

      From the old world ashes a new central bank/financial system must rise.

  5. BC Real Estate Association “an unprecedented paralysis of economic and social activity”

    REIA: “I have no doubt that our buyers will continue to purchase regardless”

    • Was walking the dog past an open for inspection this morning.
      Sign out.
      Agent sitting in car. No clients.
      The agent left- forgot to pick up his house open sign as he left. May not need it😊

      • Should make some stickers to put on those signs when they’re not looking: “Free BJ with every inspection! Inquire our agent now!”

  6. When I start thinking about the knock-on effects of this virus my little brain just shudders. A left field question – if tax receipts fall (and transfers up) would Federal Govt seek to limit its overall expenses by offering redundancies within public service?

  7. 300k a year coming in. Judas priest what kind of insanity is this. Time to say jobs for locals. Stop bringing in more competition.

    • blindjusticeMEMBER

      Heard back on radio today that farmers in Bundaberg are worried about not getting backpackers for fruit picking.

      • Best thing I have heard recently. Wage inflation! Might actually incentivize productivity improvements.

  8. Specks of red appearing on the daily index. Melbourne down twice this week, which hasn’t happened since about July last year. I thought it would take longer to appear in the Corelogic “data”, but who knows that the hell is happening at the moment.

    I wonder if Shane Oliver and his idiot mates actually believe the bullsh1t they spout? Surely not.

    • LOL @ Sydney still rising. Whoever idiot is buying now deserves to be wiped out, when the imminent crash is no longer a “risk”, but a known certainty.

    • darklydrawlMEMBER

      I think he’s getting in as many relations parties as he can before they get closed down. Must be exhausting work.

    • darklydrawlMEMBER

      Called a local plumber on Monday – showed up Wednesday as scheduled (early even!) and did the gig for a reasonable price. It’s on folks!

  9. “While the coronavirus takes global stock markets for a wild ride, it’s left Australia’s sacred cow, its beloved property market, well enough alone.”

    Because the av property investor is more ignorant than I am, but financial reality will soon fix that.

    • darklydrawlMEMBER

      Like “thanksgiving” turkeys most of them. Fat and protected until they’re not.

  10. Its credit that will be the problem.
    London, post GFC, 2009 – Banks could only lend 3.5 – 4x your salary. No exceptions.
    So do some sums: To buy a $1m property you need 200k deposit + 50k stamp and legal + 200k household income x4

  11. The people who are likely to lose their jobs from the coronavirus measures are renters. They are not mortgage holders.

    It’s a nice wish list from North but unlikely.

    As much as I hate to say this, there is not going to be a crash in house prices in Australia. Any argument you provide can be refuted.

    • Lenny Hayes for PMMEMBER

      Pretty interesting generalisation.

      I know five people in my immediate circle of friends who are SME owners or contractors at MNC’s. They are all looking at the bullet in the next month and they are all (sizable) mortgage holders.

    • kannigetMEMBER

      Yeah, coz if your only a renter your not worth paying anyway…..

      Unless your trying to imply that home owners dont have jobs anyway…..coz banks love lending to people who dont have jobs….

      You may be able to formulate a sentence but that in itself is not a refutation….

  12. Mining BoganMEMBER

    I’m enjoying the now weekly Cairns property updates from the agent who sold my place five years ago. It must have really hit the fan up there. Thinking about a massive lowball on something just to rile her up and get taken back off the list.

  13. SoMPLSBoyMEMBER

    With exponential ‘growth’ in anything (cells,viruses, populations, property prices etc) one can anticipate exponential ‘decay’.
    Equilibrium is part of the design.