Risks of a winter chill

As temperatures drop in home values, keep a weather eye out for hazards.

THE previously booming Sydney and Melbourne residential property markets declined in value last month.

Perth property dropped as well, while the rest of the capital cities were flat. Sydney and Melbourne property values are still well up on the last year, and even so far in 2017, but there is no doubt the market is cooling.

That’s great news for home affordability and also for the Reserve Bank, which wants to take the heat out of the key Sydney and Melbourne markets.

A soft landing, rather than a crash, in the housing boom is the desired outcome. But that’s the tricky bit.

Some experts, particularly from overseas, suggest this is the start of a well- overdue crash that will bring our housing bubble back to reality.

Other local experts say these dire predictions just don’t grasp the nuances of the Sydney and Melbourne markets, which are driven by strong immigration, a shortage of supply and intense investor interest.

To be frank, who really knows with any certainty what the future will hold?

There are certainly no current signs of a market crash but, as investment history shows us, things can change quickly.

So what are the key factors, the early warning signs, that the residential property market is sliding from a soft landing to a much harder crash in prices?

Remembering that each region or capital city is a very different market, there are basically three indicators you should be keeping an eye on.

FALLING AUCTION CLEARANCE RATES

When prices are booming, auction clearance rates are high. It means buyers are outstripping sellers and snapping up properties quickly.

At the height of the property boom, Sydney and Melbourne auction clearance rates were in the low to mid- 80 per cent mark. Over the past couple of months, as price growth has slowed, clearance rates have eased back to the mid to high 70 per cent.

That fall in clearance rates is nothing to be alarmed about, because anywhere above 70 per cent still reflects a solid market. But if it falls to the mid to low 60 per cent region, and there is an increase in private sales against auctions, you need to be wary.

Clearance rates at that level reflect a falling market that is at risk of a hard landing.

FALLING OFF- THE- PLAN SETTLEMENT RATES

A property valuation boom always leads to a development boom. As values rise, property developers see higher prices as a great opportunity to cash in on a strong market.

Like other investors, developers understand that the key is to get your timing right.

That’s why many sell projects off the plan before construction. It locks in buyers early, when they’re keen to snap up anything available, and the 10 per cent deposit they lodge can help secure finance for the project.

But a lot can happen between putting down the deposit and having to pay the remaining 90 per cent up to three years later. Markets can turn down, banks can tighten lending criteria and an oversupply of stock can come on to the market.

That’s the fear of some for Sydney and Melbourne over the next few months. A number of off- the- plan projects started three years ago during the boom are about to complete.

If a high number of buyers can’t settle the purchase, it could be a recipe for real trouble. The ripple effect could be devastating for market sentiment.

RISING VACANCY RATES

If rental vacancy rates start to rise significantly, it means investors are not getting a return and could be forced to sell at lower prices. The investment property market is big … particularly in Sydney and Melbourne. And many of those properties are negatively geared.

If rental income dries up, many investors could be forced to sell to meet their loan repayments. Or they’ll need to lower rents to attract tenants.

Either way, it puts pressure on falling property values.