Is Sydney’s residential property market bottoming out ? – On this data, maybe

October 11th, 2018

In their recent blog Decoding Property Buying Intentions Digital Finance Analytics (DFA) has extracted data from their 52,000 strong data base to assess current, nation wide property buying intentions.

Borrowing from Bachman Turner Overdrive’s 1974 song the blog is subtitled: “You ain’t seen nothing yet”.

On this rare occasion however, we don’t necessarily agree with DFA.

Here’s why:

Embedded in DFA’s commendably granular data are several early signs that the bottom of the macro Sydney residential property market could have been reached or at least, could be near.

Starting with “transaction intentions”, while DFA’s data shows a startling fall in both portfolio and solo investors intending to buy in the next 12 months , only some unspecified percentage less than 20% of portfolio investors and 10% of solo investors intended to sell in the next 12 months.

This hardly suggests an investor stampede for the exits even in the face of daily mainstream media reports of Armageddon caused by an oversupply of units on which Edwin Almeida elaborated in a DFA podcast on 2 October 2018. (While Mr Almeida is undoubtedly right in relation to those parts of the Sydney unit market that are being increasingly oversupplied, he also assumed it will inevitably affect the rest of the Sydney property market. Although this risk of course exists, it did not materialise during Sydney’s last unit glut in 2002. Instead, the market boomed until the first of four 0.25% rate rises led to a correction far steeper and longer than the present).

Those transaction intentions also suggest any further credit tightening will have little impact as the correction from that shock is already well underway.

Further, as the first DFA chart shows, all other possible transactors (excluding Re Financiers) are either unmoved by the present market (Want-to-Buys and Holders) or actually rising in number (Up-Traders, First Timers and Down -Traders).

The blog goes on: ...” the number of people trading down is rising, with more than 50% of these looking to sell”… We agree this is what the data shows (which also means nearly 50% are not looking to sell).

The data does not show however that the number of Down -Traders are looking to sell ” before prices fall further”.

In addition to there being no chart showing expected price falls in the next 12 months for any of the segments, the first chart (green line) actually shows only a modest increase in the number of Down -Traders as at September 2018 and a trough to peak variance in that period for this segment of only about 14%.

According to the second chart, the percentage of this segment feeling it will need to borrow more is at its lowest ever level since 2013 suggesting a bullishness about the prices they can achieve on down trading. (why then, you might ask, does the last chart in the blog show Down – Traders as the segment experiencing the second highest number of loan rejections behind Re Financiers especially as “few [in that segment] are interested in acquiring an investment property”? We don’t know).

So, while the gap between intending Up –Traders and their presumed counter part Down – Traders is the largest since 2013, it has not widened significantly since 2013 and according to these charts, is only about 7% wider than its historical widest in July 2015.

That said, the third chart shows Up – Traders as the most price bullish of all segments with 35% expecting house prices actually to rise in the next 12 months compared to their Down -Trader counter parts who, at 18%,  are the least bullish but far from desperate. This is consistent with what Curtis Associates, an exclusive buyers’ agent, is experiencing in the field and might explain why some sellers are prepared to wear a loss on sale to achieve a proportionately greater longer term saving on buying a superior property in this, the same market.

We therefore cannot see any support in this data for the conclusion that …”prices are set to fall further and quite quickly.”

While we agree “[t]he spring season appears all but shot” it is not because of a FONGO driven flood of properties hitting the market. On the contrary and as both Corelogic and SQM Research confirm, new listings are in fact significantly lower than this time last year.

It is because turnover generally will slow as a result of:

  • the exodus of investors
  • other sellers staying on the sidelines (‘only sell if you have to’)
  • the tighter lending conditions confirmed by DFA’s blog and
  • Christmas being just around the corner.

Conclusion:

While we are not calling the bottom of the current market, our tentative optimism squares with an emerging body of other evidence starting with anecdotes we have posted in  the last three weeks and now including:

  • the upwards direction of the recently released “ANZ House Search Indicator” that tracks search engine keyword search trends against house prices as a forward indicator
  • DFA’s own Household Financial Confidence Index released today in which:

 – 39% say their net worth is higher now than a year ago, 28% say they see no change and only 25% say their net worth has dropped
– NSW recorded the highest level of confidence relative to all other states with the downward trend in previous months having clearly levelled out and
 – the number of active owner occupiers has also levelled out

  • The Westpac Melbourne Institute Index of Consumer Sentiment October 2018 also released today which records that although …”[t]he [not seasonally adjusted]  ‘time to buy a dwelling’ index slipped a further 0.9%.[nationwide]…buyer sentiment is still well above the lows seen through mid-2017”.

Only time will tell  if the better sub title for DFA’s blog might instead have been from Yazz’s 1988 song “The only way is up baby.”