The market explained: What buyers and sellers need to know

Australia’s major property markets have boomed since 2012 with median property prices at new highs. While not all capital cities have boomed Melbourne and Sydney have soared. Some markets are slowing, such as Perth, while other markets have been stable or haven’t grown as strongly, such as Brisbane.

Melbourne’s real boom kicked in during 2013, with house price increases of 9.9 per cent, followed by 6.8 per cent growth in 2014, according to Domain Group data.  Already to June 2015, house prices are up a further 6.1 per cent.

Sydney has seen the strongest growth over the boom period – over 2013 and 2014, the harbour city grew more than 30 per cent in total.

Unsurprisingly, this has property experts and home owners wondering – how long can it last? 

Are we heading for a cooling market?

At this point in the cycle there are early signs of a cooling real estate market in Sydney and, to a lesser extent, Melbourne.

In Melbourne, since the end of June, clearance rates have slowly dropped and record numbers of auctions have been recorded. More than 1200 homes were up for auction on Saturday and clearance rates are now routinely down below 75 per cent.

In Sydney, the sharp drop in the clearance rate has been even more consistent since August, with the market in a faster decline than Melbourne.

Part of this slowdown is an effect of rules made by the banking regulator, the Australian Prudential Regulation Authority (APRA), which has caused banks to increase interest rates for investors, as well as restrict how much they can borrow in some instances.

However, whether a cooling market will cause a bust – as predicted by Macquarie Bank who expect a drop in prices of 7.5 per cent from 2016 – may be down to the Reserve Bank hiking interest rates.

When interest rates are increased, people’s ability to borrow is reduced and prices are known to fluctuate in line with the RBA’s decisions.

Very few economists are forecasting this to happen soon – in fact some, such as AMP Capital’s Shane Oliver, still expect to see cuts.

Is this a break for first-home buyers?

First-home buyers have been at record lows in Sydney, however Melbourne’s new market entrants have already been back on the rise.

As investors step out of the market and competition decreases, it could be a positive for home buyers but with prices at significant highs it’s not just a case of waiting until the boom is over.

After the boom, first-home buyers will still face new median price highs – above $1 million in Sydney and above $600,000 in Melbourne. Slowing growth will give them time to catch up with their savings, but won’t necessarily make the market immediately more accessible.

With the threat of rates being increased out of line with the RBA, it may not only be less affordable to buy when the boom has run its course but also more expensive to hold onto a home. In some areas, lenders have imposed higher LVR requirements.

Another boost for first-home buyers is the construction industry – one of the beneficiaries of the boom. Record levels of home building in Sydney and Melbourne, particularly in the apartment sector,  will see more supply and more opportunity to get into the market.

What about sellers? 

Sellers have seen considerable capital gains in their homes over the past few years, meaning that even a moderate drop in prices can be weathered by those who have owned a home through the boom time.

For those looking to sell and buy, this may mean that sellers need to make some decisions about whether they sell their home first and buy later or vice versa. In a falling market, buyers may be more choosy, which means that homes might be on the market longer and selling for a discount.

When auctions tip into a buyer’s market, which is when the auction clearance rate dips below 50 per cent, sellers should be realistic with their asking prices, reserve prices and overall expectations.

The market may get tougher for sellers, but for long-term property owners they are still likely to reap the capital gains of the past two years.

What has been behind the boom? 

​Usually, Australian real estate markets are identifiable by their “step” growth – that is, a period of growth followed by a period of no growth, repeated. 

The most significant factor behind the property price boom has been interest rates.

With the Reserve Bank lowering the rates to a record low 2 per cent at the May 2015 meeting, property investing suddenly became far more attractive to investors as borrowing was cheaper and bank deposits showed little return.

In May 2012 the interest rate was formerly 4.25 per cent and the RBA since looked to spur on the economy, including the housing market, during the downturn of the mining boom.

This caused renewed housing market activity, with an unexpected surge of investors. This was apparent in Melbourne with competition at new highs, while investors made up more than 60 per cent of buyers during the peak of the past two years in Sydney.

Coupled with tight supply in certain coveted areas, the snowball of positive market sentiment, strong population growth and appetite from offshore investors, property prices were bound to be encouraged.