Exciting news. After five summer weekends of aching silence, the real estate market is back and the 2019 auction season is starting up.

This weekend there could well be an auction near you. Will there be crowds? Will there be bidding? And most importantly, will there be a decent auction clearance rate?

The clearance rate is probably the best real-time signal we have of the state of the housing market. Price data is more detailed but it is backward looking — by the time sales are all reported the data is months old. Clearance rates, however, reveal the truth of the market in real time. Even where large numbers of auctions are unreported by agents, that in itself is very revealing of market weakness.

Last year, falling auction clearance rates led falling prices. As clearance rates got lower and lower, price falls got deeper and deeper. Average house prices across Sydney, Melbourne, Brisbane, Adelaide and Perth finished 2018 down 6.4%.  

Will 2019 see those falls extended? The clearance rates send a signal it might. By the end of 2018, clearance rates were languishing at unusually low levels. In the last three months they were 43.6% across the country, down from 62.3% in the corresponding period in 2017 according to data from research firm Corelogic.

Unsold stock

When a house fails to sell at auction, it can be sold afterwards, removed from sale or left on the market. The worst outcome for home-sellers — and the best news for eager buyers — is when stock is left on the market.

Australia’s shelves are brimming with unsold stock right now. Melbourne alone has 36,000 unsold homes up for grabs, far more than the 29,000 available at the start of 2018, according to figures from SQM Research. That unsold stock means this weekend’s auctions represent only the tiniest fraction of the market. A vast iceberg of property is floating out there below the surface, hoping buyers find it.

So will buyers be encouraged to put in a bid for a sale outside auction?

There are many reasons to hold off. The royal commission into banking will report this Friday and if commissioner Kenneth Hayne decides to skewer the banks for their lending practices, buyers might be forgiven for expecting finance flows to contract and house prices to be lower later in the year.

Also, if Scott Morrison continues to lead his troops toward certain defeat, the prospect of a Labor government bringing in changes to negative gearing rules also comes to look more certain.

One short-run effect of a looming Labor victory may be encouraging investors to buy before the likely changes come in, so they can lock in their tax deductions now. But they must also have an eye on the chances of selling those properties to another investor down the track. If changes to negative gearing make property investing less of a national sport then the odds of capital gains on those loss-making rentals must surely shrink. That is another factor cooling the market in 2019.

The Opal Tower fiasco combined with the large number of apartment developments due for completion in 2019 may also be clouding the decision for prospective apartment buyers. Is it wise to buy a brand new apartment right now? As 2019’s real estate market ticks into gear, the answer to that question is especially uncertain.

Propping it all up

The forces of uncertainty and oversupply certainly seem to have the upper hand. But do not discount their sworn enemies — the institutions who will fight to get those clearance rates back up the minute they look to be threatening the economy.

The Reserve Bank board will meet for the first time in 2019 on February 5, and falls in property prices — which keep setting new records and appear to be accelerating — will surely be top of the agenda. By then the Board will know this weekend’s auction clearance rate and the content of the Hayne report. If the real estate market looks dire enough to crunch the real economy, expect the RBA to indicate a willingness to step in.

With an official interest rate of 1.5%, there are six cuts of 0.25 percentage points before the official interest rate gets to zero. The RBA’s Philip Lowe has so far been unwilling to use even one. But inflation is low and consumer sentiment took a surprising plunge in December. This could be the year the bank decides more stimulation is necessary.

After so many years of property prices going in one direction only, 2019 will be a landmark year for Australia — not only our economy but the role of property in our collective consciousness. Long protracted falls could really change things. And it all starts this weekend as those auctioneers warm up their vocal cords after a long break.

Will their performances culminate in a triumphant cry of “Sold!”, or will their efforts be met with a wall of silence that ends with property being passed on? Will the clearance rate manage to rise above 50%? Much depends on the answer.

Peter Fray

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