Rate hikes into buyer exhaustion?
What’s on our mind: Another rate hike in November? What is buyer exhaustion, and are we experiencing it right now? Our take on the current state of the property market.
What happened this week: Aussie inflation came in higher than expected.
What are we watching next week: US cash rate decision.
Prelude:
What’s on our mind:
The Reserve Bank Of Australia thinks the cash rate could be increased in two weeks time.
The RBA cited higher house prices, “unexpected” strength in inflation and a lower AUD exchange rate for the potential rate hike…
Anyone who can read between the lines knows that the only thing prompting the change of narrative is the lower AUD exchange rate.
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Inflation doesn't just magically happen… certain things in the economy need to change for it to come about… like the exchange rate going lower.
Every time the AUD/USD exchange rate decreases, the RBA is forced to put rate hikes back on the table to stabilise the AUD.
A lower AUD exchange rate means we pay more for imports… which means higher domestic inflation.
For anyone wondering why petrol prices were above $2 a litre - the exchange rate is to blame (and partially higher oil prices).
Put simply, a lower AUD exchange rate means more domestic inflation… and more pressure on the RBA to raise rates.
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Our take on exchange rates and inflation here: Australian dollars impact on property prices
Where is the Australian property market right now?
The last few months have thrown up higher property prices and calls from market commentators that the market is back…
Anyone following the property market would see the highlight sale results each weekend - a property selling for a price well above its reserve.
What gets missed in all the noise and commotion created from those highlight sales is the rest of the properties that were passed in, withdrawn from the market or had their auction dates extended.
The reality in the market right now is that listings are starting to pile up, liquidity is drying up with fewer buyers as every weekend passes, AND it's taking longer and longer for agents to close deals.
Those with beachfront properties or in the most expensive parts of the cities are setting suburb records, whereas properties in the outer suburbs have to be discounted to find buyers.
For those familiar with the stock market, this phenomenon of low volumes but high prices is a classic “exhaustion signal.” -
Put simply, it is where there is a momentary push higher in prices on lower volumes.
It is also typical “end of the trend” behaviour whereby the high prices are followed by a rush of volume and a breakdown in prices.
Below is Investopedia’s explanation of an “Exhaustion Signal”:
Here is what it looks like on a chart:
Explained in property terms:
The Number of buyers and sellers starts to fall - low listing volumes lead to higher prices, and the number of buyers out there starts to fall. Prices gap up as listing volumes decrease.
Increasing volumes lead to a breakdown in the trend - more property listings come onto the market, and eventually, prices start to fall.
Our view is that we have experienced that gap in prices and are now approaching the point in the cycle where listing volumes rise exponentially, and prices start to fall soon after.
Areas where there is the most supply are likely to experience the most pain…
Where we expect to see the most pain:
A segment of the market we have already started seeing some serious pain is in the new subdivisions in the outer suburbs of Melbourne and Sydney.
Co-incidentally this is where bubble-like signs were on display during the 2020-2022 property price mania.
During the boom years, buyers put down small 5-10% deposits on multiple blocks all at the same time with no actual intention of ever settling on the properties.
The strategy was to pick up as many as possible and wait for property prices to go up between the deposit being put down and the blocks being ready for settlement.
Come settlement time, the buyers would offload them via nomination sales.
During the boom years, the strategy worked as the contract prices were much lower than market values for the blocks.
Of course, when the market turns, it works in the opposite way, where the market value of the blocks of land is lower than the contract prices.
The buyers who overextended are now faced with a situation whereby they need to find money to settle on multiple blocks simultaneously OR risk losing their deposits (and potential litigation from the developers).
Anecdotally, we have heard of horror stories where buyers put down deposits on 4-5 blocks and are now happy to get rid of them all at whatever cost just so they aren't forced to settle.
Here is one example where the buyer wants to get the deposit back and walk away from a settlement.
The bubble in the major city's outer suburbs was perfectly reported on by fund managers John Hempton and Jonathan Tepper back in 2016.
While they were early in calling the bubble, no one could have predicted the COVID-induced stimulus that took the bubble to a whole new level.
The following is a great article for anyone who hasn’t read it yet...
Keep in mind it is from 2016, and a lot has changed (for the worse) since then.
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Thanks for reading,
Aus_Prop team.
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