March 2023 Quarterly Article - 'Knowing when to buy and sell is the trickiest decision a property investor in the Sydney housing market can make; is there a goldilocks time?'

PROPERTY REVIEW
MARCH 2023
Knowing when to buy and sell is the trickiest decision a property investor in
the Sydney housing market can make; is there a goldilocks time?
The auctioneer’s voice thundered like when Pavarotti is reaching a crescendo, the gavel is rising
high above his head, “going once, going twice… last chance” … the highest bidder’s heart is
pounding, and then, BANG, “sold”, the auction room erupts in jubilation. Hundreds of these
dramatic events happen in Sydney every week; usually more than half of properties auctioned sell
on the day, the majority sell within few weeks.
Residential property investors are competing with owner occupiers, usually purchasing apartments
in areas where tenancy demand is high. They’re not always buying and selling but always looking,
reading, viewing, and quizzing real estate agents at opens. But there is more to be done to get the
timing right, because the swings in property values over the last few cycles has been getting sharper.
Let’s take the current situation: Buyers and sellers are in a quandary, interest rates continue rising,
followed by the bad news on how prices are tumbling; yet on the bright side, for investors, rents are
on the rise. These thoughts are swirling around in their heads like a ball rolling on a spinning
roulette table looking to land on a red or a black number. And then, one Saturday, they view a
property that has been manicured-cushions everywhere-and the real estate agent is “a very nice
young man” they call him after the open and make an offer. The ball has landed.
Interest rates:
The question is how much further will they go? And here, with a plethora of speculators, not least
the banks who have the most skin in the game:
Big four bank’s cash rate forecasts
• CBA: 3.85% by April 2023, then dropping to 2.85% by December 2023
• Westpac: 3.85% by May 2023, then dropping to 2.85% by November 2024
• NAB: 3.60% by March 2023, remaining steady into 2024
• ANZ: 3.85% by May 2023, then dropping to 3.60% by November 2024
Most of them are predicting an average of 0.5% increase over the next three months, then a small
correction by the end of the year. This would be good if the rate of inflation is reduced; if not,
interest rates will probably keep rising. The era of very low interest rates regime is over, the world is
back to more familiar grounds. In his recent article to the Sydney Morning Herald, Waleed Ally
wrote “Right now, interest rates are not very high. In fact, they’re lower than what they’ve averaged
since 1990, and won’t reach even that average until this week’s hike is repeated twice more.” He’s
right.
It is the rise of interest rates that is causing the current property value decline because they are
coming off unprecedented lows. The more they rise the more people cannot or will not borrow.
Values tumble. In most Australian capital cities, they have been falling. Sydney has experienced the
largest decline in 2022, after a sharp increase in 2021.

Yet property values remain well above 2020 levels. Values will need to fall at the
same rate in 2023 to reach the levels of 2020.
Source: CoreLogic, February 2023.
The above graph shows Sydney’s property market cyclical nature: just in the past five years, one can
see two rises and three falls, the rises are particularly steep; and the steeper the rise, the sharper the
fall. Looking at the graph now, you can pinpoint the “goldilocks” time to buy and sell; that is, sell in
December 2021, buy in December 2020. Did we know in December 2020 that prices we about to
jump more than 20%? No.
Auction Clearance Rates:
Sydney and Melbourne are hooked on auctions; real estate agents love them because they bind the
vendor to a lengthy contract with a spectacular advertising budget; and then, all the stress and
emotional pressure on buyers and sellers, often resulting in a transaction. High percentage of
auction clearance rates are encouraging, but the direction of the trend can gauge the direction a
particular cycle is heading.
Auction clearance rates are also cyclical; but here is the point: they establish their
trends before property values establish theirs, by about six months.
If the general values of residential properties will rise or fall in six months’ time, auction clearance
rates trend line will show that now. It makes sense because buyers and sellers are not usually privy
to where values will be in six months; as discussed above, they might consider all the other factors
and make a judgement, or just let the “ball roll”.
The rational is that if more properties are selling at auctions every week; over the following weeks,
inevitably, some buyers would have been out bidden; consequently, at the next auction, they might
pay a little more or buy a slightly lessor property. This gradual increase in sales at auctions will
gather momentum; and in a few months, values will start edging upwards. Conversely, when auction
clearance rates are low and market sentiment is down, buyers can sense the desperation of the

sellers and their agents as properties are passed-in one after the other, thus the cycle spirals
downwards.
Source: CoreLogic, February 2023.
Figure 1.1 is a graph on the Auction Clearance Rates for all capital cities for 10 years, but let’s take
the last three years:
• Let’s start with the pre-covid year: auction clearance rates climbed from 40% to 70%. From
February 2018 to Feb 2020; property values were still falling from February to August 2019,
it was not until September 2019 that values stated rising, they would have continued rising if
not for the uncertainty caused by the Pandemic.
• Then by June 2020 we knew the auction clearance trend line, it was well on its way up.
Housing values were still declining; but by December 2020 they ricocheted through to
February 2022 rising by about 23% across Sydney.
• Auction clarence rates peaked in February 2021 and hovered high until mid-2021 then
started dropping; but not the values, until February 2022. If one was thinking about selling
and looked at the auction clearance trend in the latter part of 2021, one would have
decided to sell by February 2022. At the top of the market, when banks were still offering
cheap mortgages.
• During the last quarter of 2022 auction clearance rates hovered between 50 – 60% and then
increased to 68% in February, yet values are clearly still falling. Should one buy now? is
there a clear trend line yet?
Auction clearance rate trends could well be the “Canary in the Coal Mine” for predicting real estate
values direction in Sydney-and in Melbourne-because of the high percentage of sales by auction.
More research needs to be done to solidify this proposition; and it only works for six months. It
should only be applied when all the factors mentioned above are considered with equal weight, and
clear advice from qualified financial advisers. I am not one.
John Tower
John Tower
L.R.E.A
& Valuer