Housing market “becalmed” – but analysts have found one positive signal to hold on to

The bleak winter for Australia’s property market looks set to continue, with another weekend of moderate auction results suggesting price falls seen in May could extend into June.

While the Real Estate Institute of Victoria said Melbourne’s clearance rate rose to 60% on the weekend, up from 57% last weekend and 56% last year, the industry body said conditions remain subdued.

“The market continues to be subdued with activity at low levels as many investors wait to see an improvement in consumer confidence and economic activity,” REIV chief Enzo Raimondo said in a statement, after announcing 340 of the 566 reported auctions resulted in a sale, with 226 passed in and 147 of those on a vendor’s bid.

“This translates to lower levels of competition between buyers and more moderate price outcomes.”

Perhaps “moderate” doesn’t quite cut it for Melbourne – RP Data’s latest home values index for May revealed dwelling values fell 2.7% in Melbourne and are now down 8.4% in the last 12 months.

As the city heads into the traditionally quiet Queen’s Birthday Weekend period, many in the industry will be wondering what can turn things around.

It’s a similar story across the country, where a national dwelling value fall of 1.4% surprised many analysts who had expected that the 50-basis-point cut in official interest rates delivered in May could help boost the sector.

Westpac senior economist Matthew Hassan says Melbourne will remain a concern for some time as supply continues to rise despite poor conditions.

“The Melbourne market is likely to remain challenging however, with the main issue being a significant increase in new dwelling stock, as a large backlog of projects reaches completion over the next six to nine months.”

CommSec’s chief economist, Craig James, called the house price data “dreadful” and declared the housing market is “becalmed”.

Like most economists at the big four banks, he’s tipping another rate cut this week, but says it won’t be enough to restore confidence.

“Something more than rate cuts will be required to help housing,” James says.

“There is a crisis of confidence, with underlying housing demand reasonably solid, but home-owners, investors and developers haven’t got the confidence to build. Federal and state governments need to come up with a comprehensive Australia-wide solution to kick start the housing sector.”

Given the strained fiscal positions of Australian governments, that seems highly unlikely. The best hope for investors and property owners then is to look at what segments are holding up in the current environment.

Hassan and James both say it’s best to think affordable and small – while house prices fell by 1.8% during May, unit prices increased 1%, despite unit prices in Melbourne dipping 1.4% during May.

Unit prices in Sydney rose 2.2% during the month, 4.7% in Adelaide, and 1.5% in Perth, in what Hassan says are “telltale signs of improvement in more affordable segments that would be expected to respond more readily to interest rate cuts.”

Craig James says investors need to change their thinking.

“Houses are out of vogue; apartments are in demand. As a result, apartment prices are rising. Investors have to come to grip with the new reality: Gen Y wants to live close to their workplaces, cafes and entertainment venues.”

RP Data’s research chief, Tim Lawless, also points out that rental yields are continuing to shift higher.

“Rental yields are higher now compared to a year ago across every capital city. In some cities where rents have increased meaningfully, such as Darwin and Perth, gross rental yields have improved by 50 basis points or more.”