---

Wages in Australia are currently growing about 2 percent per year. Home prices, on the other hand, went up about 10 percent over the past year, and that’s not even in the priciest areas. If you live in Melbourne, home price growth was about 8 times greater than growth in wages. And that's been happening for about five years straight.

Here's a chart I created showing growth in wages and growth in home prices in Sydney and Melbourne:

How much longer do you think that can continue?

More on that later. Here’s an update on some of the latest Aussie property market stats:

The Latest Preliminary Auction Activity

There appears to have been more buyers in the market this week, as both the number of auctions and the preliminary clearance rate increased at the same time in our capital cities. As has been the case lately, Melbourne buyers did most to lift the nationwide weighted average. Both Sydney and Perth also had solid results this week above 70 percent. Canberra was the only other capital to post a preliminary clearance rate in the 70s, with Adelaide narrowly missing the mark.

It’s important to note, both Sydney and Melbourne’s final clearance rate will likely go lower after all the auction results are counted later this week. I wouldn’t be surprised to see Sydney at or below 70 percent. Melbourne will likely post a result somewhere in the higher mid-70s.

_^source

Expect auction volume to rise again next week as all the capital cities are scheduled to host more auctions than this week. This increase in supply will test the resolve of both buyers and sellers. Buyers will have more to choose from, which should lead to greater competition amongst sellers.

Last Week’s Final Auction Results

With buyers in Sydney having a little harder time coughing up cash for deposits, the New South Wales capital hasn’t seen a clearance rate above 70 percent for six weeks. Melbourne buyers, on the other hand, are a little more resilient. There the clearance rate has remained above 70 percent since this time last year.

Here are all the final capital city results for last week:

_^source

It was in the North West and Eastern suburbs of Sydney where demand was the strongest last week. In Melbourne, the suburbs taking out the top spots were the North East, Outer East and South East. The award for the best performing regional area goes to Wollongong, just south of Sydney.

_^source

Recent Changes in House Prices

As I reported last week, home prices in Sydney and Melbourne had been rising rapidly over the previous five weeks. This week, however, marked a shift in that trend. The median house price held steady over the past week, indicating that this recent mini-boom in prices could very well be coming to an end.

_^source

Looking back over the past three months, Sydney and Melbourne home values shot up 2 percent and 4 percent respectively. Brisbane and Adelaide are now both in the red for the quarter, while Perth remains the only capital city to still be in negative territory looking back at the last year.

_^source

Market Analysis

The rising clearance rates and steady price action this week could be due in part to vendors willing to take less for their properties. With supply increasing as auction volumes are starting to rise again, agents are likely conditioning their clients down on price. After all, they care more about getting the house sold and pocketing a commission than bleeding buyers for more money.

As I look at the bigger picture and what has been impacting the movement of house prices the most lately, auction volume, which is a function of supply, stands out. As you probably learned in economics class, when supply falls, prices tend to rise, all else being equal. Conversely, when supply increases, prices tend to fall as buyers have more choice and sellers lower their standard.

While home prices seem to have leveled off this week, next week will bring another surge in supply. It will be interesting to see if prices fall a little further as a result.

The Bigger Picture for Home Prices

There will be many investors who continue to see the trend as their friend. They will find reasons to expect house prices in our largest capital cities to keep going up, up, up. After all, why resist the trend? Melbourne home prices have increased 16 percent over the past year and Sydney is up almost 13 percent.

I’ll be the first to admit, with growth at that level after the crazy price increases of the last five years, it's not likely that the property market will come to a grinding halt; that is as long as nothing crazy happens in the debt markets.

Unless the RBA shocks us all and lifts interest rates or bond prices collapse in the US and EU, it will likely remain business as usual in the housing market here. We could see an ongoing moderate amount of growth in the first half of 2018, and home prices flattening out in the second half of next year or in 2019.

But there will be those who find reason to stay out of the market all-together. Afterall, home prices have been increasing five times faster than wages across the country for the last five years, with an even greater disparity looking at Sydney and Melbourne. Any reasonable person would agree that eventually that has to stop. Eventually demand will fall, supply will rise, and home prices will correct.

Alternatively, wages could increase while home prices remain flat. That’s what our government and regulators really want. But that would mean inflation across the board, and life won’t be getting any better if the price of groceries, fuel, utilities, and everything else start rising as well.

As economist from the Swiss bank UBS came out with a dire warning for Aussie this past week. He warned that our property market has now peaked and that any interest rate hikes from central bankers would trigger the mother of all property crashes, in Sydney and Melbourne especially.

He did, however, agree with me that there is a greater chance of hell freezing over than the RBA raising interest rates. “Looking ahead,” he said, “we still see price growth slowing to 7 percent year-on-year in 2017 and 0 to 3 percent in 2018, amid record supply and poor affordability.”

What virtually everyone here in Australia seems to be unaware of his how dependent home prices are on the overseas debt markets. Sure, the RBA ain’t raising rates anytime soon. But soon enough the bond bubble created by artificially low interest rates will burst and yields will spike. That will mean Aussie banks have to pay a whole lot more for the capital they lend out to homebuyers. When that happens, interest rates will rise and I will feel very sorry for all a lot of people.

Until then, eat, drink, and be merry.

_{^{featured image source}}

---

Jason Staggers