Property Market Update
The Christmas/New Year period is traditionally a quiet one for property markets. Unlike the share market, where shares change hands on a daily basis, the relative infrequency of property sales makes for a much calmer and more planned market.
So in this property market review, we will look at some data from the last three months of 2017, rather than just the last month.
You may have heard the term ‘auction clearance rates.’ The term is self-explanatory: it is the percentage of properties taken to auction that subsequently sell at that auction. Many commentators use it to measure the ‘heat’ in the property market. Higher auction clearance rates indicate more buyers bidding at auction – and more buyers typically lead to rising property markets.
According to property data researcher CoreLogic, clearance rates across Australia fell in the last three months of 2017. This is despite the fact that the number of houses being taken to auction increased. This made for a twofold impact: more properties being auctioned, but fewer people wanting to buy them.
Prices are set by the interplay of demand and supply. Prices rise when demand exceeds supply, as potential purchasers (the ‘demanders’) compete against each other to purchase to limited supply. The opposite occurs when supply exceeds demand. Here, suppliers need to offer to sell at lower prices in order to attract the buyers.
For this reason, the falling auction clearance rates indicate a softening property market: the increase in the number of auctions shows an increase in supply and the fall in clearance rates shows a decrease in demand.
The largest fall in clearance rates occurred in the Sydney market, where just 57.7% of 11,250 properties sold at auction. This was a marked fall from the rate of 66.8% for the three months from July to September 2017. Melbourne might be regarded as the auction capital of Australia, with 15,768 properties being presented for auction during October, November and December. This is almost 50% of all auctions across the country. As it happens, clearance rates in Melbourne were also the highest in the nation, at 68.1%. This was still a fall from the previous quarter’s rate of 72.6%.
Between them, Melbourne and Sydney accounted for 83% of all properties presented for auction during the period. This is why national statistics need to be read with caution: whenever a ‘national’ property market statistic is reported, this statistic is heavily influenced by these two major markets. To understand what’s happening in more local markets, we need local data.
As reported by Corelogic, the auction clearance rates for each capital city (except in Tassie, where the researchers group results for the whole state – a wise move given there was only 95 auctions for the three month period) were as follows.
Share Market Update
Unlike the property market, the share market remains open on every day other than public holidays. However, similarly to the property market, volumes in the share market tend to be lower during the month of January.
Volume is a critical factor when it comes to share market investment. This is a key thing to remember when thinking about the value of shares that are traded on any share market. In the share market, the reported price will be the price at which the most recent transaction took place. For larger companies, transactions are almost constantly occurring. This means that the reported price will be very close to the price at which you will actually be able to buy or sell shares in that company. For smaller companies, this is not the case. For smaller companies, the reported price might have no real relationship at all to the price at which the next trade will take place.
To understand this, have a look at the following two charts, which we have sourced from the website of the Australian Stock Exchange. The first chart is for BHP. The blue line shows the price at which the last transaction for each day took place. The black bars at the bottom of the graph show the number of transactions that took place on each given day. As you can see, while there are definitely days of relatively high volume, a significant number of share transactions occur each day. This is consistent with BHP’s position as one of Australia’s largest companies. Shares in BHP are changing hands pretty much all the time the market is open.
Compare BHP’s graph to the following graph for a company named Domacom. Once again, the blue line is the price at which the last trade on any given day took place. The black bars at the bottom represent the number of shares that changed hands on any particular day. (Note: the scale for the black bars is not the same as the scale on the BHP graph. The number of shares traded in BHP is vastly higher than those traded in Domacom. We show you just how much higher below).
As can be seen, there were many days on which virtually no shares in Domacom changed hands.
The term for all this is ‘market depth.’ The greater the volume of buyers and sellers looking to trade, the greater the depth. When you see a reported price, you need to also think about the market depth for shares in that company. Where market depth is substantial, then the reported price will basically be very close to (if not exactly the same) as the price at which you could buy or sell shares in that company. But where market depth is shallow, that is not the case.
We demonstrate this with the part of the Domacom graph that is coloured yellow. This period coincided with a spike in the volume of shares traded in this company. The date is Friday, September 22 2017 and 662,000 shares changed hands. This was also a period of substantial price reduction. On Thursday, September 21, 32,000 shares changed hands. The last sale occurred at 9.9 cents per share. On Tuesday, September 25, 65,000 shares changed hands. The last trade for the day was at 6.4 cents per share.
Think about that for a moment: at first glance it looks like a 35% fall in the value of shares in just three days. But the story is not that simple. What the spike really shows is that somebody really wanted to get rid of some Domacom shares. And because there was little market depth, they had to offer a substantial discount (up to 35%) to find someone to buy them.
Looking at the graph, you might think that whoever bought shares at 6.4 cents has done very well. The last reported transaction, on January 29 2018, occurred at $.12 per share. This would suggest almost a 100% return for whoever bought the shares at six cents. Not bad for three months.
But again, things are not that simple. On Monday January 29 2018, when the price was 12 cents, only 32,000 shares changed hands. Had someone wanted to sell the 662,000 shares they bought in September, they would need to offer a much lower price to attract a buyer. Only 32,000 shares changed hands at 12 cents. How much would the price need to drop if someone wanted to sell an extra 630,000?
This means that a large parcel of shares in a company with little market depth is not worth what the ‘market price’ might suggest. As a result, the quoted price for a company such as Domacom is not very informative. It tells you what has happened, but offers little guidance about what would happen if you tried to buy or sell.
This is not a problem for larger companies such as BHP. There is always many buyers and sellers for shares in companies like this. To illustrate, look at the spike in trade on BHP’s graph above. This spike occurred on Thursday, September 7, 2017, when 17,323,000 shares changed hands. The price closed at $27.33. This suggests that shares to the value of at least $473 million changed hands on that day.
How easily a shareholder can find a buyer for their shares is sometimes referred to as ‘liquidity.’ If there are more buyers, the shares are more liquid. If there are few or no buyers, the shares are ‘illiquid.’ So, if you are looking to buy shares in individual companies, check out their liquidity. Illiquid shares are much higher risk. You need to factor that into your thinking. You don’t want to get stuck holding a parcel of shares that no one wants to buy.