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8 tell-tale signs of a property market slowdown

8 tell-tale signs of a property market slowdown

What are the trends that, taken together over time, are likely to indicate a softening property market?

It can be easy to get caught up in excited reporting about declining property markets based on changes to only one or two key indicators. So what are some of the signs which can help determine whether a market really is in a state of long-term slowdown or decline, rather than, say, a temporary dip?

Taken together, and over a sustained period of time, these eight signs are likely to point to a market that’s heading towards, or has already reached, the bottom end of the property cycle.

Knowing this may help you decide, as a seller, to hold onto your property for longer than planned and ride out the downturn, or as a buyer to jump in sooner than planned to capitalise.

1. Falling median prices

Median house and unit prices for capital cities are probably the most reported and analysed real estate value indicator. But while important, there’s always a caveat to their interpretation.

In a down market, median movements can make things look a lot worse than they really are because owners at the top end won’t tend to sell whereas those at the lower end will, dragging the median down with them.

It’s also important to pay attention to quarterly, annual and even three or five-year median price movements rather than just the latest monthly rise or fall, as these can point to longer-term trends that reflect how the market is truly performing.

2. Falling auction clearance rates

Auction clearance rates are particularly important in the Sydney and Melbourne markets, which combined typically account for around 85% of all national residential auctions.

But keep in mind they're not universally popular across all sub-regions of the two big cities. You're more likely to see lower auction clearance rates and volumes the further you head out from the centre of town. 

3. Stagnant median rental rates

Weekly rental rates in the capitals have been growing at their slowest rate on record. This can point to an oversupply issue – that there are more rental properties on the market in a city than potential renters – which would typically put downward pressure on property prices.

4. Falling residential construction and new house sales

Residential new building approvals and construction were both up in FY15, suggesting Australia’s residential construction industry is still in pretty good shape.

But in July 2015, the Housing Industry Association (HIA) reported that NSW had overtaken WA as the nation’s strongest state for residential construction, with Victoria hot on its heels for second place. The HIA also noted that while detached new house sales increased by 4.2% in NSW, they fell by 4.9% in WA in the same month. So broad national figures may mask big discrepancies between states.

5. Shrinking crowds at auctions and open inspections

Many property owners or would-be buyers – particularly those in Sydney and Melbourne – will know only too well the stress and frustration that can come with being squeezed to the wall by other bodies during overcrowded open inspections.

You may also easily recall that sinking feeling as half a dozen other eager bidders crush your dreams of buying at auction by outbidding each other until the victor snaps up the property for hundreds of thousands more than you’d ever budgeted for.

Falling numbers of registered auction bidders and open house viewers are both symptomatic of things slowing down. But take note those numbers will always be different according to suburb, property type and so on – so any reduction could be off a much higher or much lower volume of people to start.

6. Increased days on market

You can often find online data for average days on market figures for individual suburbs. They’re measured by the difference between the date a property is initially listed for sale and the contract date, then averaged for all properties in the suburb.

According to CoreLogic RP Data: “If the days on market are short it is typically indicative of a seller’s market where homes are selling rapidly and buyers have little time to ponder a purchase decision. Alternatively, when the average selling time starts to rise, buyers will typically have more scope to deliberate their decision and negotiate on the purchase price.

“Short selling times will typically coincide with rising prices and long selling times will generally see less upwards price pressures.”

7. Increased rental vacancy rates

A cousin of weekly rental rates is rental vacancy rates – the figure that measures how many investment properties are untenanted or unoccupied in any one market at any one time. Essentially they’re a comparison of the demand from renters with the amount of rental supply available to them.

Typically, a vacancy rate below 2% signifies high rental demand and a market that is not producing enough supply to meet that demand. Conversely, a vacancy rate above 4% usually indicates a market that has more rental stock than potential renters – in other words, an oversupply. A market at 3% is generally considered at equilibrium.

8. Increased vendor discounting

Vendor discounting measures the amount by which a vendor may reduce their original asking price in order to sell their property.

As with average days on market, this data is commonly available at the suburb level, although unlike days on market it’s measured as a percentage rather than absolute figure – the percentage difference between the original listed and final selling prices. Vendor discount and average days on market figures also only apply to properties sold through private treaty, not auction.

The opposite of vendor discounting is likely to occur in a healthy or accelerating market. Vendors may list their property with an invitation of a "$500,000-$550,000” price guide, for example, and accept the highest offer from one of several competing would-be buyers.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Past performance is not indicative of future performance.