fear of not getting out

A new acronym seems to be getting traction, FONGO – a fear of not getting out – in this case – a fear of not getting out of the property market quick enough.

The Australian Financial Review (AFR) points out that the property downturn has left 450,000 properties in Sydney and Melbourne with homes worth less than what they paid. Melbourne and Sydney property prices have fallen 10% and 13% respectively over the past year but the lower prices have not particularly lifted auction clearance rates. The national auction clearance rate was around 56%, much lower than the 66% clearance rate achieved this time last year. The expectation is that clearance rates will drift off for the remainder of the year. Interestingly, real estate agents have shifted their sales tactics to private sales rather than the auction process. In Melbourne last weekend 871 auctions were scheduled but there were 827 private sales. Private sales are a much opaquer price discovery process since the only price information you receive is between yourself and the agent. With auctions, price discovery is open and transparent. But if you are a well-informed buyer, you can negotiate a lower price as sellers compete for a smaller pool of buyers, or risk leaving the property unsold.

A bubble that is bursting is Melbourne’s house and land market. The median price for a housing lot rose 31.5% for the 12 months at the end of 2017 (Macrobusiness). Larry Schelesinger wrote in the AFR in February that 40% of Melbourne housing lots are resales. Speculators had been trying to flip the sales contract prior to settlement in the hope of a quick profit. Other buyers who are unable to get financing are also trying to get out of their contracts. The expectation is that around 5000 lot sales in Melbourne’s new housing estates would either default or be on-sold (AFR 28th February 2019). Lot Sales peaked 18 months ago at 24,000, but currently are around 12,000 lots.

As credit growth slows and the continuing uncertainty of the approaching Federal election, the fear of not getting out can only increase as buyers remain scarce.

Some late news from the AFR this afternoon (Monday 18th March): “The fall in Sydney real house prices is close to hitting its average downturn decline at only halfway through the average downturn cycle, setting it up for the sharpest drop for the city since 1965, a BIS Oxford Economics study shows.

The average downturn for Sydney house prices is 14 quarters and the average total real price decline each downturn is 21 per cent. The current downturn has progressed through six quarters to December 2018, but real median prices – taking out the effects of inflation – are already down 16 per cent.

This could mean Sydney house prices have either dropped faster than average downturn cycles – five cycles since 1965 were analysed – or it could bode tougher times ahead with more price falls to come, BIS Oxford Economics’ Angie Zigomanis said”.

Further Update: AFR 6:55pm 18th March. “Economists warn of rush to sell as property prices fall:

Economists expect a sell off in homes as investors’ “fear of not getting out” becomes more acute in response to falling house prices.

While weekend home auction listings have halved – there were 931 on the weekend, down from 2,153 the same time last year – that could all change as investors re-calibrate their expectations on prices and even consider renting.

According to a Reserve Bank sensitivity analysis in a discussion paper last week, if home owners adjusted their 10-year expected real house price gain from 2.5 per cent per year to zero then real house prices could fall by a third over five years.”