7 December 2021
1300 794 893

What's next in the cycle?

John McGrath
18 December 2017

By John McGrath 

After a five year upwards trajectory, we are now seeing affordability constraints and tighter lending conditions softening demand in both the Sydney and Melbourne markets.

Affordability is always a factor at the end of booms. The market cycle eventually reaches a critical price point where buyers begin to exit the marketplace. Some owner occupier buyers renovate instead of trading up while others leave the city altogether.

Many investor buyers begin to lose interest as capital growth prospects wane and yields become too small to service the loan. 

The combination of restrictions on lending to investors, the cap on interest only loans and higher mortgage rates for investors have been major factors reducing demand as well. The latest statistics from APRA for the September 2017 quarter show investor demand has fallen and new interest only lending is at its lowest level on record. 

Typical post-boom market trends we expect to see over the next year include an increase in stock, as more vendors come to market with hopes of achieving a final boom price and thousands of new apartments are completed following the construction boom.

Apart from first home buyers, we will see a gradual reduction in demand as investors exit and owner occupiers struggle with affordability. The buyers remaining in the market will be choosier given improved supply, leading to an increase in average days on market.

Auction clearance rates will fall back to the more normal rate of sale around 60%. After several months of post-boom activity, vendor discounting will increase as sellers finally adjust their expectations and accept that boom level prices are no longer achievable.

Price growth will continue – albeit at a slower pace, particularly in Sydney and Melbourne’s best suburbs. The citywide medians will rise and fall over many months as the market rebalances.

Overall, there is a possibility of a minor price correction and this would be healthy for the long term sustainability of our major city markets following such a prolonged period of rapid growth.

According to the latest monthly report from CoreLogic, Sydney property prices have fallen by 1.3% over the three months to November 30. Saturday auction clearance rates have also dipped into the mid 50% range. 

The Melbourne market is also softening but at a slower pace than Sydney. Prices are up 1.9% over the three months to November 30 and clearance rates are hovering in the late 60% range.   

CoreLogic says Melbourne is doing better because it’s more affordable, has higher net migration and has had less investor activity during the boom, therefore the exit of investors in both cities due to tighter lending restrictions has not hit the southern capital as hard. 

My best advice to buyers and sellers over the next six months is don’t let yourself be distracted by the headlines. Yes, the boom is over but the opportunity to make money in the Sydney and Melbourne markets will always be there if you keep a long term view. 

This is my final column for the year. I’ll be back in January with more market insights but until then, I wish you and your friends and family a wonderful Christmas and holiday season. 

Want to know the 5 Stocks Peter Switzer & Paul Rickard are buying in October?

We're giving you FREE access to find out which stocks our Switzer Report experts think have the highest upside in October and beyond!

Get the latest financial, business, and political expert commentary delivered to your inbox.

When you sign up, we will never give away or sell or barter or trade your email address.

And you can unsubscribe at any time!
1300 794 893
© 2006-2021 Switzer. All Rights Reserved. Australian Financial Services Licence Number 286531. 
homeshopping-cartphoneenvelopedollargraduation-cap linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram