Falling housing market should make RBA tread carefully: Gottliebsen

In traditional markets, shares fall and then six to 18 months later the property markets take a tumble. After the 1987 share crash, property actually rose in value before coming tumbling down around 18 months after the big share fall.

In traditional markets, shares fall and then six to 18 months later the property markets take a tumble. After the 1987 share crash, property actually rose in value before coming tumbling down around 18 months after the big share fall.

This time around we are seeing a much closer link between the property and share markets. Housing markets around the country are in decline and commercial property is very soft. And the fall in the listed property trusts signals more than just unhappiness with the listed property trust model. We are likely to see a substantial fall in commercial property values in the wake of the decline.

Naturally in both the housing and commercial property market there will always be pockets where there are markets that move against the trends.

The Reserve Bank will not be unhappy with a fall in the housing market and believes that the fall in both commercial and domestic property will be reduced by the fact there are no current gluts.

What is not widely understood is that the Reserve Bank has concluded that the enormous investment planned for resources and infrastructure means that the housing and commercial property markets have to take it on the chin to avoid a blow-out in costs in the sector.

Interest rates will remain at high levels until the rump on the infrastructure investment passes – though there could still be interest rate falls if the downturn gathers momentum or there is a serious overseas situation.

But any interest rate fall will be governed by the need to keep the housing sector subdued.

This will have serious consequences for those building companies that are not involved in resources and/or infrastructure.

It will also cause sharp rises in rent. Also, the yield on investment housing will rise as values slip but the rate of new building is held back.

It is a very narrow path that the Reserve Bank is treading.

This article first appeared on Business Spectator.

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