Auctions hammered by interest rate rise, experts warn more prices will be under pressure in 2011 if rates keep climbing

The property market was slammed over the weekend, with the latest interest rate rise sending auction clearance rates down to the low 60s in Melbourne as investors back away.

But experts warn the pain is set to continue, with economists predicting another rate rise in early 2011. Louis Christopher, head of SQM Research, says if that were to occur then capital cities would start recording price decreases.

“If that were to happen, the market would weaken even further. We’re now looking at the average lending rate getting into the mid-high sevens now, and another rate rise will push it even higher.”

“If it gets to that point, we believe the market will start to record house price falls. Market conditions will deteriorate, and capital city house prices will fall in that scenario. It will simply accelerate the decline.”

In fact, house prices are already falling, or at least stagnating. The latest figures from RP Data for the September quarter revealed prices in Brisbane fell 2.1%, Hobart and Adelaide prices dropped 1.4% and Sydney recorded a 0.9% fall.

Christopher says the most recent activity over the weekend has scared off investors, who are no longer willing to risk their hand in a market likely to fall behind in the next few months.

“There was a definite impact on the weekend, and it’s the investors who have stayed on the sidelines. They are holding back because costs are increasing, the market is slowing and conditions aren’t great.”

“Investors are momentum operators, and they will only jump in the market when they see capital growth on the board. And looking forward, it’s not certain there will be much capital growth in the medium-term.”

And that uncertainty isn’t likely to subside any time soon. Economists including CommSec’s Craig James predict if interest rates are set to increase, they will do so in early 2011 as the Reserve Bank attempts to keep inflation under control.

But another interest rate rise could be a death blow to the property market. Westpac chief economist Bill Evans has previously warned that a variable mortgage rate of 8% is the point at which consumer confidence begins to fall.

Last week’s 45-basis-point rate rise by the Commonwealth Bank pushed its own variable mortgage rate to 7.81% – very close to Evans’ turning point.

“We are very close to that point, I would think,” says Real Estate Institute of Australia president David Airey.

“Consumer confidence is being hit across the board, credit card rates are over 20% and fixed mortgage rates are going up.”

“And the price signalling, which includes price signalling by the RBA, is hurting as well. They keep signalling that rates will increase, which is hurting consumer confidence as well.”

Airey says while last weekend’s results could have been worse, he warns that another rate rise in early 2011 will hammer the market “pretty hard”.

“Given that January and February tends to be a bit of a holiday mode, it wouldn’t be something to look forward to.”

In Melbourne, the REIV recorded just a 61% clearance rate out of 633 properties on the market. Chief executive Enzo Raimondo says the result is a consequence of the latest interest rate increase.

“The interest rate increase has certainly had an impact on buyer confidence this weekend with a clear drop in the clearance rate compared to the past few months.”

“Some buyers will be concerned that more banks will increase rates independent of the Reserve Bank.”

Total sales reached $196 million, while Raimondo says next week should provide good opportunities for buyers with over 920 auctions slated for the 13th.

In Sydney, clearance rates reached just 54.6% with 592 properties on the market, according to Australian Property Monitors, with total sales reaching $161.7 million.

Adelaide recorded a rate of just 50% with 78 properties on the market, while Brisbane recorded a 46.2% rate with 59 auctions and total sales worth $4.5 million.