A two-tier property market is developing

Credit: Alex Livet

Despite record numbers of auctions over the weekend, clearance rates in most capital cities were strong, particularly in Sydney and Melbourne.

Victoria had 1,784 auctions over the weekend, with a clearance rate of 72% according to New South Wales had 1,103 auctions and a clearance rate of 75%. Domain reported that Sydney had a clearance rate of 75.8%, below the 76.3% recorded last weekend, and below the boom-time rate of 87.5% recorded on the same weekend exactly one year ago.

Sydney auction clearance rates Mar 2016


But the combined figures hide a disturbing trend. Clearance rates in Sydney’s outer west were 42%, while the lower northern beaches saw monster clearance rates of 92%.

Domain chief economist Andrew Wilson says that Melbourne was much more consistent, with only a 10% difference in clearance rates between the highest and lowest priced houses up for auction. Melbourne had more than 1,600 auctions – the second highest level in history, with a clearance rate of 74%.

Those results for Sydney suggests that first home buyers and investors looking for cheaper property are either absent from the market, or sellers’ price expectations may be too high.

In fact, it’s highly likely that both are partly true. After the banking regulator came down hard on the banks last year to limit lending to investors to 10% growth per month, many banks imposed stricter conditions on borrowers, including lower loan-to-valuation ratios (LVRs) and higher interest rates.

Additionally, anecdotal evidence suggests that foreign buyers had been leaving the market, but perhaps they have returned, given recent clearance rates.

That’s good news for 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), which are likely to see decent credit growth – if the trend continues. And it seems clear that owner-occupiers are currently driving the market, either via upgrading their existing home, or downsizing.

Foolish takeaway

Initial fears of a property market slump or even a crash appear to have been overdone. Home prices may not soar like they have in the past year or two, particularly in Sydney and Melbourne, but they also appear unlikely to fall off the cliff. However, the facts also suggest that houses at the lower end of the price spectrum, particularly outer-western Sydney may struggle to sell.

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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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