John McGrath: Is the real estate market cooling?

With property prices continuing to hit record highs despite predictions of cooling in the Australian market, real estate industry veteran John McGrath dives into what it will take to stop our biggest boom ever.

John McGrath, founder and executive director of McGrath Estate Agents, says the market is normalising but there’s still a way to go with prices. Picture: John Feder/The Australian.

Australian housing values have been going up at the fastest rate in 30 years, up more than 20 per cent nationally over the past 12 months and up 28 per cent in the strongest market – Hobart, and up 25 per cent in both Sydney and Canberra.

The market generally remains strong, however the rate of price growth has slowed in recent months. The national median price has gone up by about 1.5 per cent per month consistently since July, compared to the peak monthly growth rate of 2.8 per cent recorded back in March.

That’s not a cooling market. I’d say the market is normalising but there’s still a way to go.

Prices are still going up and whilst 1.5 per cent per month doesn’t sound like much, on an annual basis that’s 18 per cent per year, which is very strong growth in anyone’s language.

John McGrath speaks at this year’s Australasian Real Estate Conference – the first to be held in person since the Covid-19 pandemic began. Picture: Social Focus

Auction clearance rates remain very healthy and well above average, despite a high volume of auctions this Spring. In the last week of November, we saw the number of weekly auctions go above 4,000 nationwide for the first time ever, according to CoreLogic data.

The volume is high right now because lockdown periods have pushed campaigns out, and buyer competition is fierce so more vendors are choosing to sell via auction to capitalise on the extraordinary demand.

On top of that are seasonal factors, with November usually a high volume month as people try to sell before Christmas and the beginning of the new school year.

The combined capital cities auction clearance rate peaked in October at 83.2 per cent and now it’s about 10-15 per cent lower due to that recent volume surge. A 70 per cent-range clearance is still very strong given 60 per cent is the baseline for normal market conditions.

The boom in housing prices has been fuelled by massive demand off the lowest interest rates in Australia’s history. Picture: NCA NewsWire / John Gass

The boom market we have seen in 2021 has been mostly fuelled by the historically low official interest rate of just 0.1 per cent. Just 10 years ago, it was 45 times higher at 4.5 per cent.

It’s entirely inevitable that the market will cool at some point, but it won’t be because of rising interest rates – or the official cash rate, anyway. The Reserve Bank has already told us that won’t be happening any time soon.

It’s more likely that affordability will be the first factor that cools the market down – and it’s already starting to bite. Not only have prices risen by more than 20 per cent, but people’s borrowing capacity has been reduced because APRA has tightened credit criteria and some banks are raising fixed mortgage rates.

John McGrath in action as auctioneer at a Saturday auction where the house sold for $1.825m. Picture: David Swift.

The ratio of housing values to household incomes is also at a new record high in many city and regional areas, according to CoreLogic data.

Put all of that together and affordability will inevitably become an increasingly significant cooling factor over time, resulting in an orderly market correction at some point.

A lack of stock has also driven this year’s strong price gains, however this is also changing. A greater number of homes for sale naturally dilutes buyer competition and this is helping the market to normalise a bit today.

Not only are auction listings rising, but we also saw the highest number of new private treaty capital city listings on record advertised on realestate.com.au in October.

The Brisbane market is expected to perform stronger than southern capitals due to its relative affordability. Picture: Richard Walker

Listings increased by 21.9 per cent in just a month, according to the latest REA Insights Listings Report. The biggest increases were 35 per cent in Melbourne, 30 per cent in Canberra and 26 per cent in Sydney. Brisbane listings increased moderately by 7 per cent.

In the regions, listings increased the most in regional NSW at 14 per cent and regional Victoria at 15 per cent.

There’s a lot of people predicting modest price falls in 2022 and 2023 in the media today. I think it’s inevitable that the market will correct at some point, however predicting the timing of that is hard given we don’t know what the pandemic will bring next.

If you’re looking to buy, you don’t need to worry about whether the market is going to cool tomorrow. Property is a long-term game and you should plan to hold the next asset you buy through at least one or two cycles, which means a couple of growth spurts and a couple of market cool downs at a minimum.

That’s the normal experience for property owners in Australia, so don’t let short-term predictions change your long-term course.

– John McGrath is the founder of McGrath Estate Agents, which has sales offices across Australia’s Eastern Seaboard.

Originally published as John McGrath: Is the real estate market cooling?