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Higher demand, clearance rates signal rising property market

Spring has sprung when it comes to property sales. Both Sydney and Melbourne are reporting very high auction clearance rates, and buyers are having a harder time securing homes with a lot more competition making house hunting frustrating.

In mid-September, the Sydney clearance rate came in on top, racking up a 84.3% with more than 800 properties under the hammer. Melbourne came second with a 73.6% rate for 974 homes. In the months of 2013, housing median prices grew by 8.13% for Sydney, Perth rose 5.7%, and Melbourne achieved 5.1%. Brisbane lagged at only a 1.64% rise year on year, but most of that increase has come within just the most recent quarter.

Although consumer confidence in the economy as a whole still needs to improve to really say the market downtrend is past us, record low interest rates are spurring on home buyers, and property investors are increasingly coming back to market, making it harder and more expensive for new home buyers to purchase.

The RBA paused its rating cutting last month to gauge the effects of previous cuts on the economy avoid providing too much stimulus, yet as soon as it did, Aussie dollar exchange rates popped back up. The central bank was hoping that a weaker dollar would allow it to ease up on rate loosening, but that was quickly proven mistaken.

With this increase in prices and housing needs in general, developers and home builder companies like Stockland (ASX: SGP), AV Jennings (ASX: AVJ) and Peet (ASX: PPC) stand to benefit. As areas with established homes closer to CBDs become more in demand and causes prices to rise, investors and first home buyers alike will look to cheaper, more affordable housing, and this will drive them to new housing developments.

As we reported earlier this month, housing starts data from the Australian Bureau of Statistics (ABS) have been increasing, so a trend is forming.

One way that these companies are helping make housing more affordable is to decrease the size of the average lot, reducing the land cost component of the overall house price. This will increase demand for new homes, and will also raise revenues because developers can create more lots in the same area, and home builders’ can have a higher number of sales.

According to a BIS Shrapnel report, there has been a number of years of low new housing construction, creating a disparity between supply and the pent-up demand for housing. Usually this is reflected in rising rental prices since people can’t or don’t want to buy a home, driving down rental vacancies.

Foolish takeaway

Basic supply and demand forces are coming to play once more. Already, share prices in builders and building materials companies like Boral (ASX: BLD), CSR (ASX: CSR) and Reece (ASX: REH) have started to show improvement already. If a true housing market boom is about to be upon us, that could mean a number of years of growth for those involved in construction.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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