We are now in the middle of the important Spring season for the housing market.
However, a torrent of negative factors and tighter lending his seen house prices in the key markets of Sydney and Melbourne fall. They have been falling for some months.
Auction clearance rates are seen as an early indicator as to what direction house prices are going. Some say a clearance rate below 60% shows house prices are falling, some say it's a rate of below 50%.
Property portal business Domain Holdings Australia Limited (ASX: DHG) reported an initial clearance rate from this weekend for Sydney of 44.5%. However, Domain senior research analyst Nicola Powell said the revised figure would likely fall to between 38% to 40% after agents report all of the actual results.
Fairfax Media Limited (ASX: FXJ) speculate that the rate could fall as low as 37%.
Despite Sydney prices being at least 6% lower than a year ago, according to CoreLogic, the clearance rate is even lower than it has been in recent months. This suggests the price falls may continue for a long time.
Melbourne also registered an initial clearance rate of below 50% this weekend, it came in at 48.6%
I've been writing for a long time that investment properties are not great assets to buy. When you include the cash losses ('negative gearing') and transaction costs (stamp duty, lawyers, selling agent) there is only one clear winner to me – shares. I hadn't even mentioned the positive benefit of franking credits.
If shares fall 10%, you still have 90% of your capital left. If a property falls 10% your entire deposit and equity could be wiped out.
Many people are now predicting substantial falls for property, such as leading economist Shane Oliver from AMP Limited (ASX: AMP). He recently outlined a number of reasons why property could keep falling:
- Continued poor affordability
- Tightening of banking lending standards under pressure from regulators
- Interest only loans switching to interest & principal
- Banks withdrawing from SMSF lending
- A cutback in foreign investor demand
- Rising unit supply
- Out-of-cycle mortgage rate increase
- Falling price growth expectations resulting in 'FONGO' (fear of not getting out)
- Expectations that negative gearing and capital gains tax concessions will be reduced
Foolish takeaway
I believe it could be at least two years before we see property prices consistently stop falling. I've said all along that REA Group Limited (ASX: REA) would be a much better investment to get property exposure rather than owing a single building in one location.
