A week after the RBA slashed the cash rate to a historic low of 1.00 per cent and just a month since the last cut to the cash rate (to 1.25 per cent), how is the real estate market behaving as a result?
On a macro level, affordability remains as much a concern as it ever did to many Australians. The national household-debt-to-disposable-income ratio remains at a record high of 189.6 per cent. According to CoreLogic, national median house values have increased by 412 per cent over 2 years, while wage growth has slowed in the past five years. The Wage Price Index (WPI) grew at an annual average of 2.2 per cent in the five years to December 2018, which sits lowers than the average annual growth of 3.3 per cent in the previous five years to December 2013. However, the 2018 slowdown in the real estate market, demonstrated by the 8.2 per cent decline in national dwelling value since peaking in October 2017, made some impact on consumer confidence as the market shifted in favour of buyers.
The recent two cuts to the cash rate to historic lows surprised many, and has become a signifier of the RBA’s nod to the government to begin pulling its own levers to aid the sluggish national economy.
“The uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside,” said Philip Lowe, Governor of the Reserve Bank of Australia, in his statement during last week’s cash rate cut. He continued with a nod towards the efforts of international governments in taking direct action in their own economic performance.
“In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.” Perhaps a thinly veiled encouragement to our own federal government, Philip Lowe’s comments suggested that the RBA’s actions were just a cog in the larger machinery of economic management required to support any sort of turn around in the economy, commenting that the cuts are intended to “help make further inroads” and to “assist with faster progress in reducing unemployment”.
With the rate of decline in national dwelling values for May slowing to 0.4 per cent, as reported by CoreLogic, it is expected that improved consumer confidence will create similar results for June, pushing the market away from a further downturn, increasing volume numbers, and decreasing the average time spent on the market as we enter the busy Spring period. Last weekend’s auction and sales results in Victoria confirmed this turnaround.
The Real Estate Institute of Victoria noted a clearance rate of 72 per cent over the weekend. While a relatively strong clearance rate (considering last year’s clearance rates of below 40 per cent), sale volumes were down 45 per cent from last year to 290 properties.
This strengthening of clearance rates signifies a response to increasing confidence in the market as well as to recent regulatory changes, such as the cash rate cuts and the relaxing of borrower serviceability lending standards announced by the Australian Prudential Regulation Authority last week.
These relaxed lending requirements and record-low interest rates will likely support the continuation of a buyers’ market for some time, but the macro effects of these changes may not be immediately noticeable, despite signs of increasing buyer interest and confidence.
One such sign was seen over the weekend in the leafy Melbourne suburb of Briar Hill. 120 Mountain View Road saw 105 feet pass through its doors while it was on the market, and then went under the hammer on Saturday for well over the reserve of $690,000, when bids of $100 finally saw it sold to a mother and her daughter for $821,600.
Scott Nugent from Jellis Craig Eltham assured the highest bidders that it would be the best $100 they had ever spent.
“The owner spent the right amount to get the home ready for sale in terms of repairs and cosmetic refurbishments, and I think this made all the difference when it came down to auction day,” says Scott. “We’re seeing a strong market for renovated homes. People are happy to pay a bit more of a premium for those homes.”
Consumer confidence has also begun to improve across Melbourne, but especially in those middle ring suburbs that attract a broad range of buyers, from investors to first home buyers.
“The budget of our average buyer at open for inspections is now looking at the $700,000 to $800,000 mark, whereas that fell late last year to as low as $200,000,” Scott continues.
“People understand that now is the time to get in, as the market has bottomed. As far as the recent changes to lending are concerned, we are communicating this to buyers, but I don’t think we’ll see the benefits of this for another couple of months. Some people are still working through existing loan applications and are still finding it difficult to secure financing, but we should see this change.”
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