Each Saturday afternoon between 2:30 and 3:30 pm, I receive a text message from a real estate agent who provides his distribution list with an update of how the day went. Last Saturday, his tune completely changed, which intrigued me. Here's the text:

I commend him for his honesty - well done. And it's true. Clearance rates have been falling sharply since mid 2017 (see below chart).

Source: AMP

Clearance rates have dropped from a solid 80% to about ~46% (final) in Sydney, and ~49% (final) in Melbourne. The last time we saw these levels were back during the GFC and 2012 (when interest rates were first cut).

Here's what the auction market looked like last week:

Source: Core Logic

Allow me to give you insight as to the implications (at least historically) of falling clearance rates. They're a leading indicator for house prices by about 5 months (see chart below). As auction clearance rates fall, we see property prices fall in the following months.

Source: JP Morgan

Not only are clearance rates a leading indicator, so too are housing finance commitments (loans). These have also been falling (see chart below). Loan commitments are a leading indicator by about the same time as clearance rates - 6 months.

Source: JP Morgan

As the regulators and banks tighten lending standards, as we continue to see a rise in the supply of dwellings, as affordability is still an issue given low wage growth, and with the constant drumming of political and policy uncertainty (negative gearing and CGT discount), we can expect further weakness ahead.

As I began to write this note, I found out that 60 Minutes was airing 'Bricks and Slaughter' at 8:30 pm (click here for the 'Part One' episode).

The episode was basically calling for a housing crash. Martin North of Digital Finance Analytics predicts a housing crash of 40%-45% within the next 12 months, and we hear Louis Christopher of SQM Research echoing Mr North's call.

Follow these gentlemen on Twitter and you will see a slightly different point of view:

Note: I DO NOT believe the Australian housing market is going to crash. Syd & Melb are significantly overvalued but I take the view the overvaluation will likely unwind over a longer period of time. #60minutes 1/

— Louis Christopher (@LouiChristopher) September 16, 2018

I stated in my interview with #60minutes the risks as well as the safety valves that are still present in the market. E.g strong local economies, strong population growth, banks very unlikely to fail, etc. The program covered my comments on the risks and overvaluation only. 2/

— Louis Christopher (@LouiChristopher) September 16, 2018

Anyway, I think I have said what I wanted to say here. It was largely the @DFA_Analystshow afterall! 45% down the next 12 months?! Ok, over to you, Martin!

— Louis Christopher (@LouiChristopher) September 16, 2018

My full quote was 4 scenarios, A 20% chance of a severe correction over the next 3 years (if US economy system stalls as rates rise there) creating GFC mark 2 with property here heading 40-45% - BUT THIS IS NOT MY CENTRAL SCENARIO. See https://t.co/qnjHLOFPm6

— Martin North (@DFA_Analyst) September 16, 2018

Well done 60 Minutes in fear-mongering the Australian public.

To this day, we continue to hear comparisons being made to the US property bubble. What most people don't understand is that the "housing market" is made up many other smaller 'markets'. To illustrate this point, take a look at the table below. It shows the top 10 US cities' boom from 1996-2006, crash from 2006-2011, and so on.

Take a look at New York, up 173% during the boom, and down 24.45% during the bust. Dallas was down 7.53%, and Boston down 16.38%. The interesting thing about all of this is that the city with this largest gain (LA) was not the city with the largest fall - it was Phoenix, down almost 55%! On average, the US housing market fell 33%.

One fact that I don't believe gets enough showtime is the oversupply of dwellings in the US pre GFC. Leading up to the GFC, the US had overbuild close to 6,000,000 units of housing. As of the beginning of 2018, the US is sitting close to 2,000,000 units short (see below chart).

In Australia, we have a very different story (see below chart). For many years, we have never truly caught up to the demand for dwellings. Having said this though, we are getting to a point where we are now seeing good supply hit the market.

Source: NAB

The Australian, specifically Melbourne and Sydney property market has been running hot for a number of years now. We will see a collapse in prices - timing and magnitude, no one truly knows. However all indicators are pointing to a slow down and natural correction.

The fundamentals for property in this country remain strong, yet the sentiment remains weak. The market will present buying opportunities for those that are patient, disciplined, have a game plan and are cashed up. As foolish as one may feel for holding funds in low returning cash and term deposits, the tide will turn, and you too will have your opportunity.