Prestige property at risk after sharemarket falls, but rate cut could stabilise prices

Prestige property is at risk of losing value as a result of the massive downward movements in stock markets over the weekend, but overall the residential property market is holding up and prices could even stabilise if interest rates are lowered this year, experts say.

The comments come as speculation is rampant over how the Australian consumer base will interpret the downgrade to the United States’ credit rating, particularly in the already weak residential property market.

Experts say the risk to the property market is likely to be contained in the prestige sector, which was also the first area affected during the 2008 financial crisis.

“There is a risk to the high-end property sector in terms of the significant market turmoil,” says Housing Industry Association economist Harley Dale.

“However, I do think the risks outside of the market are likely to be well contained. I would argue the big risk is that we talk ourselves into more worse of a situation that it actually is.”

Property investors are keenly watching how markets will perform this week, given the poor performance of the market in the last six months. With global stock markets falling upwards of 5% last Friday, there is a risk that trend will continue this week and impact on prestige property.

SQM Research managing director Louis Christopher agrees.

“Over the medium-term, it has belted confidence quite a fair bit,” he says.

“And all that does is give more attention to the outstanding debts that are in the system, individually and collectively, and makes us more conscious of that debt.”

“The auction clearance rates were pretty much in line with prior results. But I think the response is going to be seen over the next few weeks. The performance of the equities market could also seriously dent confidence in property.”

Christopher also says listings are likely to increase in the few weeks before the Spring selling season. “We could also see clearance rates fall once we get into September unless there is some type of market revival.”

However, there is an upside. These experts say that with the market now pricing in a rate cut for September – both ANZ and Westpac now expect the next move from the RBA to be a downward one – potential buyers of residential property could be given a much-needed boost to confidence.

“It’s very unlikely that we’ll get any interest rate rise for the foreseeable future,” he says. “The RBA just can’t raise rates now. It really would have the capability of putting us into a recession.”

“If there were to be a rate cut, it’d do quite a bit for confidence. It may well stabilise the market.”

Dale says while the short-term outlook for residential property activity is still weak, an interest rate cut would help spur buyers back into action.

“Before all this occurred the prospect of a substantial decline in new home building has unfortunately escalated. Interest rates would be only part of what would be required in order to help the market if that were to occur.”

The auction results for the weekend were consistent with the past few months, with rates in both Sydney and Melbourne below 60%.

According to the Real Estate Institute of Victoria, “the falls recorded in the stock market do not appear to have impacted the residential auction market”, although both Dale and Christopher believe it will take a few weeks for the effects of stock market falls to seep into property.

The REIV said there were 460 reported auctions, resulting in a 57% clearance rate.

In Sydney, the clearance rate was 56.2% with 199 reported auctions, while Brisbane and Adelaide recorded rates of 21.4% and 17.6% respectively.