‘Two-tiered market’ putting pressure on homebuyers

Seasonal exuberance is rolling through the real estate market but it’s an easier path to a new home for some home buyers and not others.

We’ve seen remarkably strong clearance rates over the first few weekends of auctions this year, with robust demand and a continuing tight supply of homes for sale in many markets.

The national preliminary clearance rate has been consistently above 70 per cent, and in markets where there are a higher number of homes going to auction this year compared to last year, clearance rates are still coming in higher despite that greater volume of stock.

For example, CoreLogic data shows that in the week ending February 18, Australia’s auction capital, Melbourne, held 961 auctions with a clearance rate of 72 per cent. In the same week last year, auction volumes were 15 per cent lower and the clearance rate was weaker at 66 per cent. Sydney held about the same number of auctions that week compared to last year but this time around the clearance rate was 10 per cent higher.

These results indicate more than seasonal exuberance.

Auction clearance rates have been consistently high across the country. Picture: Julian Andrews

MARKET CONFIDENCE IN RATE CUTS

I think we’re seeing rising market confidence due to the prospect of interest rate cuts later this year. Recent economic data has stoked this optimism. Inflation has fallen to 4.1 per cent per annum, and while the Reserve Bank says this is still too high, it’s the lowest level in two years and we’re clearly on a downward trajectory. The latest Westpac-Melbourne Institute consumer confidence survey clocked a 20-month high largely due to cooling inflation and an improved outlook on interest rates.

While the market is strong overall, it’s also two-tiered.

The top end is probably as strong as I’ve ever seen it since I started in real estate 40 years ago. There is a lot of demand for prestige properties in Sydney and Melbourne’s wealthiest suburbs. Some of recent results for harbourfronts, penthouses and lifestyle acreages have been phenomenal.

This trend will continue, and I also think good quality homes in desirable neighbourhoods within a 10km radius of Brisbane, Sydney and Melbourne CBDs will also perform well this year.

At the other end of the scale, first and second home buyers have been far more impacted by higher interest rates and cost of living pressures. The biggest challenge is they can’t borrow as much. So we haven’t seen the same price growth and depth of demand at the bottom end of the market.

MAKES SENSE TO BUY RATHER THAN RENT

However, for a lot of people, it still makes more sense to buy than rent because rents have gone through the roof.

We’ve seen 30 per cent to 40 per cent growth in rents over the last 12 to 18 months in many markets that we’re operating in. That rental strength is why we’re still seeing good levels of first home buying despite high rates, however, many young buyers have needed help from the Bank of Mum and Dad.

Investors are starting to come back after sitting on the sidelines for a while, waiting to see where interest rates would stop. They may see this period ahead as a good time to come into that lower end of the market and secure good-quality assets for the long term.

Across the East Coast, clearance rates are strongest in Sydney and that market is powering along. Brisbane’s got a lot of good news happening over the next five to 10 years, mainly relating to the 2032 Olympic Games and all the infrastructure that has to be built beforehand. Brisbane has had some increase in values, but it still represents better value than Sydney and Melbourne. Melbourne hasn’t quite kept pace with Sydney and the gap has got a bit bigger recently, so there will be some form of catch-up for it going forward.

Judging by these recent auction results, it seems to be a very good time for sellers to make a move.

* John McGrath is the founder, Managing Director and Chief Executive Officer of McGrath Estate Agents

Originally published as ‘Two-tiered market’ putting pressure on homebuyers