Picking the bottom of the property cycle is a difficult task, but in all likelihood the residential property market has now passed through the lowest stage of the cycle. Mix this with the RBA's interest rate cuts and buyers are likely to come out of the wood work.
The recent decision by the Reserve Bank of Australia to cut the official cash rate by 100 basis points was an unexpected but welcome move. There hasn’t been such an aggressive move by the RBA since 1992, and in percentage terms this is one of the largest single cuts in history. The cash rate is now 6% and the average standard variable interest rate has been cut by 80 basis points to reach 8.4%.
From the July ‘08 peak when the average variable home loan rate reached 9.6%, mortgage rates have fallen by 1.2%. For a loan amount of $300,000 the fall in interest rates equates to a monthly saving of $300.
Most economists are predicting further interest rate cuts during 2008 and into 2009, with some suggesting the cash rate could be slashed by a further 100 basis points over the next three to six months. A further 100bp cut on mortgage rates would result in a $550 monthly saving in interest payments on a $300,000 loan from the July peak.
The wild card of course is how much of the official rate cuts the banks pass on to consumers. With credit becoming increasingly scarce globally, wholesale funds are becoming more expensive. Until money markets relax it is unlikely Australian banks will pass on any official interest rate cuts in their entirety.
With two consecutive falls in interest rates and more around the corner it is likely the broader consumer market will begin to view the residential property market with a higher degree of confidence. During the first half of 2008 national sales volumes have been about 25% lower than the ten year average highlighting the effect of low confidence on the market. Greater confidence in domestic economic conditions combined with the prospect of ongoing falls in interest rates should result in an upswing in market activity, in turn placing renewed pressure on price growth.
The return of more buyers to the market is likely to be gradual, however. Globally economies are slowing, financial and equity markets are very volatile and a great deal of uncertainty remains. Such unstable conditions will stand in the way of any dramatic rises in consumer confidence. For investors, the stability and proven resilience of the property market is likely to be very appealing. Over the year to date the S&P/ASX 200 index has fallen by 31% bringing the overall value of the index back to mid 2005 levels. In contrast national dwelling values have lost only 1.3% in value (year to end of August).
With more buyers flowing back into the market the peak buying conditions that have been evident for most of 2008 may soon be over; the window of opportunity is starting to close. More buyers means more competition which means less time to consider a purchase and less leverage when negotiating. In all likelihood, the latest interest rate cut has highlighted that residential property is more than likely through the eye of the storm.
The market to show the first signs of improvement will very likely be Sydney. Overall house values are still below the Feb ‘04 peak of $598,700 and the gap between Brisbane and Melbourne has never been narrower. In addition, Sydney is recording the lowest vacancy rate of any capital city (around 1%) indicating pent up demand has been building for some time. The more affordable areas are likely to be the key markets to watch, particularly the middle ring and outer ring suburbs where prices have languished for the last four and a half years, as well as Sydney's inner city unit market which is very much undervalued.
The upper end of the residential market and holiday home locations are likely to be slower to recover due to the ongoing uncertainty surrounding global equities markets and corporate profits. Affluent areas and discretionary investment assets such as holiday homes are much more affected by share market conditions and low levels of business confidence.
