Last weekend's auction clearance rates in Sydney fell close to 50% suggesting that property vendors will have to drop the price if they want to sell across Sydney's weakening property market.
Melbourne's initial clearance rate came in at 63%, with Brisbane at just 38% according to data provided by Fairfax Media (ASX: FXJ) owned Domain Group (ASX: DHG).
Sydney's clearance rates are now approaching levels last seen before the great property bull market of 2012-2017 that sent residential property prices around 70% higher on average across the Harbour City.
The soaring prices were mainly supported by two factors, overseas buyers taking advantage of a weakening Australian dollar (in 2012 the US dollar bought less than 1 Aussie dollar) and the RBA's cash rate cutting cycle that extended buyers' borrowing power.
Most data providers now record the peak of the property boom as mid-2017 and it's notable that as of July 1 2017 the foreign buyers' property surcharge was doubled from 4% to 8% in a move that met with the peak of property prices.
Exactly how much property in Australia is bought with overseas capital is unknown, but when you consider price-to-average-pre-tax-local-income ratios in Sydney are now around 13x, you can see prices are inflated by overseas capital. The 8% tax on foreign purchases looks set to keep downward pressure on prices.
The salient price pressure factor though is investors and owner occupiers' perception that the next move in cash rate will be higher, which means asset prices move lower.
The RBA and prudential regulator APRA are now caught between a rock and a hard place given prices are softening with rates already at an ultra-accommodative 1.5%.
The Banking Royal Commission also looks set to force banks to tighten lending standards which could put the breaks on credit growth as a core driver of bank profit growth and property prices.
Recently shares in the Commonwealth Bank of Australia (ASX: CBA), National Australia Banking Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all hit multi-year lows as the credit growth outlook darkens.
Most analysts are forecasting Sydney's prices could fall around 10% from their peak, although those forecasts may prove optimistic if a perfect storm of falling buyer confidence, rising rates, disappearing foreign buyers, and tighter lending standards hits.
As such bank shares face more weakness ahead and dividend investors may be better off forgetting yesterday's blue chips to look for the blue-chips of tomorrow….
