The positive relationship between auction clearance rates & house prices

The recent May 5th Deutsche Bank Data Flash (Australia) commenting on the ABS Established House Price Index for Q1 2011 had this great chart which clearly shows the positive relationship between clearance rates and house price growth (in Sydney and Melbourne at least…) which I thought was worth sharing.

Note importantly the 2 quarter lag Deutsche apply to clearance rates to illustrate this positive correlation, which indicates that current auction rates are a pretty good predictor of house price growth in 6 months time…

Auction clearance rates & house prices

The main points Deutsche Bank made re the residential housing market were:

  • they see a trend of sideways to small declines in nominal house prices over the coming year.
  • in a broader sense they expect a long, slow house price ‘adjustment’ in Australia where inflation erodes real house prices over time. (In a similar manner, growth in incomes and rents should see price to rent and price to income ratios also decline over time.)
  • they expect nominal house price declines extend a little over coming quarters as they ‘meet the market’ and they remain strongly of the view that in the absence of forced sellers driven by a significant increase in the unemployment rate or interest rates, a self reinforcing downward ‘spiral’ in Australian house prices remains extremely unlikely.
  • the risk of a downturn in China is cited as a possible catalyst for a house price slump in Australia, the extent to which such a scenario is realized would in fact depend heavily on the extent to which domestic policy settings were eased to offset the impact of any such global shock. (That said, we would in such an environment expect Perth to under perform Sydney or Melbourne.)
  • their broader view implies that we continue to see the structural underpinnings of the Australian housing market as being robust. In our assessment little here has changed since our Australian Economics Monthly of 11 August 2010…

Please email me if you would like a copy.