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Falling auction clearance rates confirm property prices are headed down

Sydney’s auction clearance rate fell below 60% for the third week in a row, at 59.3%, suggesting house prices won’t be far behind. It was the lowest clearance rate since February 2013.

Melbourne clearance rates were at 64.7%, according to CoreLogic RP Data, under 70% for the fifth week in a row according to the property group.

It’s a clear sign that property buyers are abandoning the market in our two major capital cities, spurred on by rising interest rates from the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) and actions limiting investor lending, such as higher deposit requirements and high interest rates.

Domain reported similar results for the 872 listed auctions it tracked in Sydney over the weekend, with an auction clearance rate of 57%, and 66% for Melbourne.

As we wrote back in October 2015, should auction clearance rates fall below 50% for Sydney and 55% for Melbourne, it’s a clear sign of falling house prices. Interestingly, Australia’s other capital cities are also showing a slowdown in clearance rates, suggesting it’s not just the red hot price growth of the past year or two in Sydney and Melbourne that is deterring buyers.

Also key will be the Australian Bureau of Statistics data for housing finance commitments. Investor loan growth tends to taper off when market conditions move out of the growth phase – in other words- go backwards.

The problem for Sydney is that on average, prices tend to be much more volatile than other capital cities. Prices tend to fall further in Sydney than they do in capital cities, and also rise faster, as the following chart shows.

Source: ABS

Source: ABS

In 2011 when Sydney’s median house price fell 10% over two quarters, Melbourne median house prices fell 1.4%. When Sydney house prices stormed back in early 2012, rising by 14%, Melbourne prices instead fell 3.4%.

Foolish takeaway

Falling auction clearance rates are a clear sign that house prices could be on the wane. While not all cities and suburbs will move in step with each other, most Australians are likely to see the value of their home fall in the next six to twelve months.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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