Volumes are collapsing. Is it bad news?
I’ve seen a few people make a big deal about the recent fall in property sales.
We’re just not selling as many homes as we used to. That’s killing real estate agents. McGrath issued another profit warning last week. Ouch.
And the standard line in the business goes that when sales start falling, then prices follow.
But I’m not quite sure this is true. In fact, I wonder if the causation actually runs the other way.
CoreLogic gave us a good summary of the state of play last week:
The number of properties selling within a given year account for a very small portion of the overall market with the trend even lower over recent years; over the 12 months to July 2018, 4.6 per cent of national dwellings transacted, down from 5.3 per cent a year ago.
I think it’s always worth remembering how few homes are sold each year. In that sense, prices are a bit misleading.
Prices are simply the prices of what has sold, not of every house in the market. So when we say, prices in Sydney have fallen 6%, we’re not saying that every house is now worth 6% less. We’re just saying that the ones that sold this year, sold for 6% less than the ones that sold last year.
In that sense, prices actually aren’t a great guide to what your home is worth. They might be a guide for what you house could sell for right now, but that’s kind of a different thing.
Anyway, the point is, our key to understanding 100% of the market is based on what’s happening in just 5% of the market.
Anyway, back to the idea that falling volumes drive falling prices.
The more pronounced decline in turnover rates over the year to July is hardly a surprise given current market conditions, with dwelling values softening each month now for the past 12 months; coupled with the lowest levels of new stock being added to the market seen since 2012 over the past 6 months, as confidence wanes and homes take longer to sell.
Take a look at that chart there, comparing turnover in the capitals vs regional areas.
What’s interesting is that regional volumes are holding up. They’re pretty much just flat lining.
It’s a very different story to the capitals.
But note that the regionals have been out-performing the capitals since the middle of 2016.
Now if it was volumes that drove prices, you’d be expecting the regionals to be posting better results since about that time.
But they haven’t. Regional areas have only started outperforming in recent months, as prices have started to come off in our major markets.
So I think there are some more ‘structural’ forces at play.
And I personally wonder if a lot of it has to do with transaction costs. A lot of the costs involved in selling a property – whether its agent’s fees on the seller’s side, or stamp-duty on the buyer’s side – rise in proportion to price.
Stamp Duty in particular is now just crazy expensive.
So that’s got to be acting as a disincentive to sell.
It wouldn’t surprise me that as prices rise, there are naturally less transactions going on, because the price of transactions has going up.
The other thing I reckon is happening is that as prices fall, people are less inspired to sell.
That’s particularly true if you bought around the peak and don’t want to crystallise your losses, but it’s also true if you’re just selling for other reasons.
So say you’re not sure about selling, but then someone comes and offers you something $200K higher than the previous best price on your street.
“Fan-flipping-tastic”, you think. “Sold.”
Now imagine a scenario where you are thinking of selling, but the best offer you get is a full $200K less than what Bob down the road got 6 months ago.
“I’m not selling for that. I have my pride.”
The property market has a natural stabiliser. As prices fall, people simply become less willing to sell – for no real reason other than the fact that prices are lower.
(Think about it. An environment of falling prices is the perfect time to trade up. You sell, wait a bit, and then buy a better place for exactly what you just sold your old place for… less transaction costs! )
But this is just how the market is.
And one of the reasons why the property market is such a stable asset class.
So turnover is not pointing to price falls.
Price falls are pointing to falling volumes.
That keeps prices steady, though it does suck if you’re a real estate agent.