Is the residential property market heading for a soft patch?

After a strong run, auction clearance rates are now dropping and the time it takes to sell a residential property is increasing. What’s changed?

A range of signals inside the residential sector – especially in the larger cities – suggest the heat is coming out of the market, particularly in Sydney and Melbourne. Picture: iStock

The three months to the end of March may have been as good as it gets for the residential property market this year as a soft patch looms.

Residential prices had bounded ahead in the first three months, climbing by 1.6 per cent, initially suggesting they could exceed the consensus among the big four banks of a 4 per cent lift across the entire calendar year.

But a growing expectation there will be no more rate cuts in the local market in 2024, combined with a lot more homes coming up for sale, is now starting to bite.

A range of signals inside the residential sector – especially in the larger cities – suggest the heat is coming out of the market, particularly in Sydney and Melbourne.

With many more homes now coming up for sale, the clearance rate – the headline indicator of sentiment at auctions – may be beginning to slide.

Commenting on the clearance rate last weekend, CoreLogic group suggested: “The additional auction numbers tested demand, with the capital city clearance rate continuing to trend lower through March, averaging 66.4 per cent over the four weeks ending March 31st.” (Clearance rates above 70 per cent indicate a healthy market).

A key factor dragging the clearance rate lower is the increased volume of sellers in the market. A year ago there were just 1700 auctions per week across the nation. The total auction number in the week before Easter was more than double that at 3500.

Moreover, in Sydney – the metropolitan market which tends to set the pace for national prices – clearance rates fell sharply, dropping from 81 per cent the previous week to 74 per cent (later revised down to 70 per cent) for last weekend.

Hovering over the market is a fear that the interest rate cuts widely expected this year will not now eventuate. Leading economists such as Paul Bloxham at HSBC and former RBA board member Warwick McKibbin are now openly suggesting the RBA will not cut until early 2025.

In mid-March Bloxham at HSBC had suggested rate cuts were unlikely in 2024 when he explained: “Inflation remains too strong. Wage growth lifting to around its current rate would not typically be worryingly high, but it has coincided with dismal productivity outcomes in Australia.”

As buyer sentiment starts to fade, the other prime indicator of property investment sentiment – time on the market- has also been going the wrong way, the number of days on average a dwelling takes to get sold has climbed very steadily from a low of near 25 days in 2022 to around 34 days at present.

According to Michael Blythe, a former chief economist at Commonwealth Bank and founder of PinPoint Macro Analytics: “The indicators are consistent with some of the pressure on prices easing, buying sentiment is at low levels, sales have eased back and time on market has lifted.”

CoreLogic’s latest report also shows the rolling four-week rate of capital city dwelling values change also slowed in April – to 0.5 per cent – against the March level of 0.6 per cent.

But industry figures are still expecting a reasonable year ahead, CoreLogic points out the auction clearance rates “overall are holding reasonably firm”.

.