Market Report – November 2017

Market Report – November 2017

PROPERTY REPORT

Last month, we reported a small fall in house prices across the country, led by a fall in Australia’s largest market, Sydney. October provided a few more indications that property markets might be cooling a little.

Property analysts Corelogic reported a fall in auction clearance rates for the September quarter compared to the previous June quarter. The National average clearance rate was 67.8% (capital cities only). This was down from 71.7% in the June quarter. Again reflecting the way its population dominates the national statistics, Sydney’s clearance rate of 66.8% was a large driver of the fall.

That said, the Melbourne market actually had the highest number of auctions for the quarter, with just over 13,000 houses being offered for sale by this process. It’s clearance rate was also the highest in the country, with 72.6% – consistent with our report last month that Melbourne’s property prices continue to rise even while other capital cities show weakening property price growth.

The term ‘clearance rate’ refers to the number of properties sold during the actual auction. So, around one third of homes that went to auction did not sell at that auction. Where a property is ‘passed in,’ or not sold at the auction because no one has offered a price acceptable to the vendor, in most places the process is then for the vendor to negotiate with the highest bidder from the auction. However, there is no rule that prevents the vendor from also negotiating with anyone else. So, a property that does not sell at auction basically becomes one being sold by private negotiation.

Real estate agents typically love auctions. This is not necessarily because auctions will get the highest price – it has a lot more to do with the free advertising that an entertaining auctioneer achieves for his or her real estate agency. Remember, the typical real estate advertising board devotes at least as much space to advertising the real estate agency as it does to advertising the home. Indeed, calling this advertising free is probably a misnomer: typically, the vendor pays the auctioneer to conduct the auction.

There is no hard and fast rule that selling a house by auction leads to higher or lower prices. In 2015, Corelogic conducted an analysis of private and auction results in various suburbs of Melbourne. They concluded that auctions achieved higher prices in most suburbs, but not all. Of course, these were also suburb wide results – it is not actually possible to compare whether a specific property would achieve a better price being sold by one or the other method.

Regardless of whether auctions are the best method for selling a home, it is generally accepted that auction clearance rates are an indicator of demand in the market. Where demand is higher, clearance rates are higher. So, falling clearance rates do indicate shrinking demand – although as we reported last month, that is not necessarily translate into lower prices, so much as lower price growth.

Share Market Report

October was a good month for the sharemarket – provided that you bought your shares beforehand. The market rose around 3.5% for the month, with the increase being relatively steady across the month. In fact, the market finished higher on all but four days during the month. You can see all this in the following graph (thanks, Google and Yahoo!)

Share Market 30 October 2017

If you were following the media during October you would have seen that it was the 30 year anniversary of the 1987 stock market crash. Unsurprisingly, many media articles ran under headlines such as “could we see another October crash.”

Interestingly, October has generally been a positive month in the Australian market. This is in part because most Australian companies report profits in September – and declare the dividends that they will pay later in the year. 40% of the Australian sharemarket is dominated by banks and other financial institutions. Australia’s banks are incredibly well incorporated into the general economy, which means that being a bank is not a long way short of owning a license to print money. Think of the rise of ‘tap and go’ infrastructure throughout Australian retailers. This technology is incredibly convenient and so it has quickly become very popular – to the point that more than half of all retail transactions are now performed electronically. Every time such a transaction takes place, a bank earns a fee.

And that is just with retail. Think of all the other ways that money changes hands in our economy (online banking and direct debits being two predominant methods). Almost all of them involve a bank, and people are willing to pay a small bank fee for the convenience and security that electronic transacting provides.

So, in September, banks typically report substantial profits and significant dividends. These dividends are payable in the following months, which often (but not always) sees significant buying push share prices higher.

Generally, the outlook for the Australian economy is a positive one. In August, the Reserve Bank reported that it expects annual growth of around 3% per year in the next few years. This is ahead of inflation, meaning that Australia will generally become wealthier. Given that all economic activity adds to banks profitability, this positive outlook is transferring itself into our sharemarket in the form of higher prices.

Some analysts would say that Australia’s banks still look cheap. For example, in early October the ASX reported the following dividend yields for various Australian banks (the growth in prices during October will have reduced these slightly):

 

Bank dividend yields 

The average dividend yield in the Australian market is typically between 4 and 4.5%. Remember, these companies and a few others like them constitute 40% of the Australian market. So, any broad-based investment into the market will have a strong representation of these companies.

Of course, it is now November and we need to be careful that we don’t try to buy last month’s sharemarket result. What these figures really underlie is that a broad-based exposure to the Australian sharemarket is likely to remain a good investment into the future. This is particularly the case if the two predominant forms of risk – specific risk and timing risk – are managed as effectively as possible.

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