Sales volumes have tanked. What’s going on? Please, someone tell me.
Here’s a puzzle for you. Let’s see if we can crowdsource an answer?
It’s got to do with volumes – the number of houses being bought and sold in Australia.
Right now, we’re living through one of the driest periods on record. It’s a veritable drought.
John McGrath had this graph in a recent report to shareholders:
As it shows, the share of total dwellings for sale right now is at the lowest level on record.
There was a particularly sharp fall that kicked in around the beginning of the year.
This is a bit of a puzzle. Why have volumes fallen – especially since we haven’t seen falls in prices in most cities. In fact, volumes doesn’t seem to be connected to the cycle at all – or at least not clearly.
So why have volumes fallen. I’m genuinely asking here. I’m not sure what to make of this phenomenon.
John McGrath reckons its because people are afraid that if they sell, they won’t be able to get back into the market.
“For much of calendar 2016, we have been in an environment in which vendors are reticent to sell, fearing they will not get back into the market.
… it was as though every vendor woke up in the New Year and made a resolution not to sell.
… In 2005, residents in Australian Capital Cities would move house on average every 6.7 years, and apartment every 5.9 years. Today that is 10.7 years and 9 years respectively. This contributes to the decline in volumes available for sale, eroding housing affordability in many capital cities of Australia, including Sydney.
Of course it’s a bugger for John McGrath. Real Estate Agents are a volumes business. They need to be selling houses to be making money.
But McGrath’s explanation sounds a little simplistic to me. ‘People are just afraid to get out of the market’. It’s not very satisfying.
I mean, maybe it makes sense now that volumes are at historic lows. It might be reasonable to worry about whether you’re going to be able to get back in if you get out now.
But that doesn’t explain why volumes tanked in the first place. It couldn’t have been fear that drove the market at that stage.
Though if you remember back to the new year, we had a very rocky first couple of weeks. Real Estate markets were still reeling from the APRA restrictions, and there was a major stock market wobble.
So maybe volumes dried up with the New Year, and uncertainty stopped people coming back. From then on, it’s been a fear of not getting back in.
Maybe. Sound convincing to you?
But the ‘fear of not getting back in’ only applies to owner-occupiers. 30-40% of the market are investors, and I don’t think investors ‘upgrade’ their investments the way owner-occupiers upgrade their homes.
That said, I think investors are more likely to hoard properties and keep them from the market. I know I do. Once a property is working for me, and it’s positively geared, why would you sell it?
So I don’t know… I need to do a bit more thinking about it. Would welcome anyone’s thoughts on it.
Part of me wonders if Australians just think about property differently these days. You can see from the chart above that volumes peaked in 1999, and have been on a downward run since then (with a few ups and downs).
So maybe everybody thinks like an investor now. Once you’ve got a toe-hold in the market, hang on to it. If you’re going to upgrade, buy a new house and keep the old one as an investment. I know a few people who have done this…
The implications are kind of interesting too. On the face of it, thin markets tend to bid up prices. If demand is the same, fewer properties for sale means there’s more competition around the ones that are on the market, and that means higher prices.
And the ongoing surge in Melbourne and Sydney, which has taken a few people by surprise, could reflect this.
However, it’s a double-edged sword. In thin markets, a small number of ‘low-side’ sales can create the impression that the market overall has fallen.
That has the potential to create a self-fulfilling run lower.
But so long as volumes fall short of the growing population and particularly first home buyer need, then I think this phenomenon will keep a floor under prices.
But I’d feel a lot better about this conclusion if I had a better sense of what was driving it.
Help a brother out?