The Auckland market is in the midst of one of its most interesting phases witnessed in the past couple of decades. Typically we see Auckland experience a see-saw market - alternating between a booming market or a retreating market.
For fully the past 11 months, the market, coming off a steady 2 year decline in sales has stubbornly, resolutely and somewhat belligerently refused to succumb to further decline; however and this is the unusual part, the market has not in anyway shown any signs of a resurgence, yet.
Analysing sales volumes is critical in understanding the market and more importantly in identifying the future direction of the market. Simply put, rising sales tend to foretell a future rise in prices and equally the converse is true - this is somewhat simplistic but helpful as a rule of thumb.
So what to make of the market we have experienced since this time last year. A year ago the 12 month total of sales for Auckland stood at 22,781, it was the 23rd consecutive month in which sales volumes on a 12 month rolling basis had fallen. From a peak in October 2015 when the total was 34,060, volumes had fallen by 33%. However for the past 11 months sales volumes as seen on a 12 month rolling basis have not changed. Not changed; as in remained within a range of just less than 1,000. Here are the raw numbers and you can see how flat the sales have been.
October 2017: 22,278
November 2017: 21,788
December 2017: 21,608
January 2018: 21,614
February 2018: 21,619
March 2018: 21,350
April 2018: 21,435
May 2018: 21,554
June 2018: 21,561
July 2018: 21,661
August 2018: 21,645
September 2018: 21,615
This is an astonishing series of numbers - the mean variance from the median of 21,614 is just 34, representing 0.2%.
This unusual plateau in sales volumes is clearly seen in the chart below which shows the past 10 years, with the inset view of the full data since 1993. Simply put there has not been in the past 25 years a period when such a prolonged plateau has occurred.
Such an unusual trend calls for an explanation. Here are my thoughts around why, and also what may be the future trend.
The period from the peak in 2005 until November of last year was the classic end of ‘the Golden Summer’ - prices had reached a level that was becoming unsustainable and coupled with tighter lending restrictions, investors particularly, parred back activity in the market as yields became unsustainably low given the likelihood of low capital growth.
There can also be no ignoring the fact that the period of the past 11 months paralleled the duration of the new government, although I would judge this more correlation than causation. However the new government has placed housing atop the agenda, added to which the publicity of KiwiBuild has potentially enthused may first home buyers, but at the same time frustrated others as it clearly demonstrated just how long it takes to activate the supply side of the market.
Ignoring the political influence, the most likely explanation is that a plateau in sales volumes is the outcome of strongly opposing forces - cheaper finance, matched to limited supply of properties coming onto the market, added to which the tail end of strong price appreciation and a strong economy, all key factors continuing to drive demand. Facing off against this is tighter lending criteria in terms of LVR but also tighter debt servicing requirements from lenders, added to which have been growing fears of global economic uncertainty and that same consistent issue of limited supply of properties coming onto the market, in this instance working against the market.
So whilst sales volumes have plateaued, what has been the resultant movement in median price? It would come as no surprise to see that median prices have also plateaued. Proving the premise that rising volumes foretell rising prices as does the opposite. Equally a ‘standoff’ in sales trends to lead to a ‘standoff’ in price movement. Over 2 years ago Auckland median sales price topped $850,000 and since then prices have barely moved. For 6 of the past 9 months year-on-year variances have been down, albeit by no more than 2%.
The one variable that has not been analysed in the foregoing charts is new listings. Adding this into the mix provides what I consider the most robust lead indicator of the property market, that being clearance rate.
In the last quarterly report published in August, with the data including July, I was confidently foretelling of a developing upswing in clearance rate and judging that the comments made at the time by the Reserve Bank Governor, that prices may be as likely to rise as to fall could be accurate on the upside. Well a further few months of data are now showing that prices may in fact be more likely to fall in Auckland as to rise. For the much heralded recovery in clearance rate has had a significant set back as shown in the chart below.
The fact of the market is that a stagnant level of sales is facing off against rising level of new listings which have lead to a drop off in the clearance rate which is significant and a setback to the heralded recovery. The rise in inventory is not to be unexpected at this time of year, however, remember this clearance rate is based on 12 months of moving total data of both new listings and sales and therefore excludes seasonal influence and more accurately therefore reflects true underlying market trends.
It therefore looks more likely that the Auckland property market is going to continue to face strong head winds in the coming months with a potential slide in prices as a buyers-market takes hold and sellers learn to adjust expectation in order to win that sale and in so doing allow themselves to become tough negotiators with their buyer-hat on.