Auction gavels point to Sydney, Melbourne property hotspots

It’s an intriguing spectacle for visitors to Australia; watching a property auctioned on the street in front of a crowd of bidders and onlookers.

Agents in Sydney and Melbourne love auctions for ‘in demand’ properties. They bring potential buyers to a decision point with force and can deliver outstanding results for their vendors.

But what do auctions actually tell us about the state of the market in Sydney and Melbourne?

Property market temperature test

While the exact percentage varies by the week, almost half of established houses in Melbourne are sold by auction along with more than a third in Sydney.

While the talk around real estate these days is around the perceived mechanics of supply and demand, the sales of properties ‘under the hammer’ tells us a lot about another factor that drives the market.

That factor is sentiment: the general perception of whether now is a good time to buy property.

You would think this should follow some easily understandable algorithm, but sometimes sentiment can swing sharply from moderately negative to bull market conditions in a short space of time, without apparent explanation.

What’s the best way to know when sentiment is shifting? I’m yet to find a better gauge than auction crowds.

Many of you will have seen some of the photos of auction crowds at Sydney in the first weekend of September and they are a pretty good guide that sentiment towards property has turned positive.

It’s a similar if not quite as exuberant picture in Melbourne. The auctions I have been attending lately are drawing crowds around 50 per cent bigger than they were in April.

Auctions data can paint a picture of one sizeable part of the market, not all of it.

Auctions tend to be held for properties ranking in the most expensive half of the price table, excluding the very top 2 to 3 per cent more commonly sold by expressions of interest (EOI).

But auction data becomes less important as we move to the outer suburbs and in most regional areas is not reliable at all.

What auctions tell us about Sydney, Melbourne

The rule of thumb is that an auction clearance level of around 65 per cent represents a market where the power between buyers and sellers is roughly even.

Where clearances are in excess of 70 per cent, the market is heading into boom territory while clearances below 60 per cent show a market struggling to increase prices.

Clearance data paints a clear picture of the Sydney market at the moment – and a positive story at that.

They reveal sentiment has shifted to bullish and that sentiment is most at home in the premium areas.

As we can see, it’s the pricey eastern suburbs leading the charge followed closely by Sutherland Shire and other areas around inner Sydney.

The more affordable areas of Sydney, by contrast, are showing buyers retaining some negotiating power.

When we look at the auction results in Melbourne there are some notable differences.

Clearances have moved up considerably on the Peninsula but this region is home to both extravagant beach homes and affordable housing.

Following behind is the outer east and the north west, where house prices sit below the metro median price, along with the north east where prices are close to the Melbourne-wide median.

Most of the more expensive areas, like the inner east and inner south, while moving up, are following some way behind.

 What's behind the Sydney, Melbourne differences?

There are a few factors driving different outcomes in these two cities.

For one thing, Sydney’s higher overall price point makes it a market where cashed up investors and home buyers trading on equity built up in property are more influential.

Melbourne, while still having these premium, typically older buyers present, has more younger buyers as a proportion of overall demand

That is due to the surge in first home buyers over the last two years and the relative decline in investors exiting the market due to an increase in land taxes payable on non-resident held property.

But there’s another difference at play and that is the total number of listings or properties put up for sale

In Sydney, the totals for all properties listed for sale is running around the 32,000 to 35,000 mark. In Melbourne, it’s just shy of 40,000.

That’s quite a difference in two metro regions reasonably close in population.

At the moment, the ownership of property in Sydney remains tight and concentrated amongst well-heeled residents.

Melbourne’s growth momentum, on the other hand, is more broadly-based.

Hotspots over the next phase of the property cycle

For investors, that makes understanding whether Sydney’s momentum shifts out to more affordable areas or remains anchored in the pricey east, south and north shore a key question.

For Melbourne, it’s the opposite. Will projected cuts in interest rates fire up the market in bayside properties or hotly contested house markets like Ascot Vale?

Or will momentum continue to favour affordable areas like Meadow Heights in the north and Croydon in the outer east?

For my part, I expect any further rate cuts to move these two cities to a convergence, where both premium markets (save the top 2 or 3 per cent) and areas with affordable family homes see their auction results converge.

Auction clearances do suggest price escalation in both cities but the high entry point means the market’s trajectory may be more nuanced in the future than what we’ve seen in the past.