Rate rise, price fall, says McGrath

Leading Sydney agent John McGrath has predicted house prices will begin to fall as interest rates rise.

McGrath Estate Agents and national property information publisher, Australian Property Monitors, have just released the latest McGrath APM Index, forecasting the growth of the Sydney property market to June 30, 2004.

Assuming that interest rates rise an additional 0.25% from December 03 to June 04 (in addition to the interest rate rise of 0.25% in November 03), the McGrath APM Index forecasts a reduction in growth in Sydney property prices by 1.0%. Individual regions will respond differently. Units in Vaucluse, Randwick and Newtown; and houses in Newtown, Manly and Balmain will be the most highly affected.

McGrath says the market has continued to display caution in the face of the recent and anticipated rate rises.

“There is little doubt that some investors are sitting on the sidelines, and likely to do so until the New Year,” he says.

“Having said that, there has also been strong evidence suggesting that our predicted slowdown in prices as opposed to a downturn has proven accurate.

“We have seen only random indication that any values have decreased – it appears though that growth has stalled for the moment. Lower auction clearance rates don’t necessarily translate into lower prices, just slower growth.”

McGrath adds that the Index is able to factor in further rate rises and the news in the medium term is clear and positive.

“Continued growth at a slower rate. We’re in a good market for both buyers and sellers to trade property with relative stability and certainty. Obviously as rates rise, those most affected will be those who are more highly geared.

“In suburbs where the gearing is higher, the Index has predicted more slowing and some market corrections. For example, Newtown houses are likely to be affected more in the face of rate rises than many other suburbs because the borrowing levels are higher.

“We also find that in an environment of increasing borrowing rates that the value of houses will go up faster than units.”

Predicted Price Changes (within 3 months) if Interest Rates Increase by 0.5%

Managing Director of Home Price Guide, Tony Shannon says Sydney’s real estate market continues to show surprising resilience, even in the face of collapsing auction clearance rates.

“It is unlikely we will see prices go back to below the levels of a few years ago, as there is still plenty of good economic news and market confidence around. It is my view that there will still be some very good prices paid, particularly in the context of their surrounding areas, but overall I think prices will at best be even or come back on the recent highs.”

The results from the McGrath APM Index for the June 2003 quarter confirm that the Sydney property market continued to experience steady growth, although the First Home Owners Grant shows signs of stabilising. For the 12 month period from June 02 to June 03, the Index increased by 10.2%. House prices grew by 11.9% and unit prices grew by 9.3% over the 12 month period.

Some Key Findings of the McGrath APM Index

1. An increase in the growth rate of property prices in the June 03 quarter with a 2.6% increase in the Index (measuring houses and units together) to 195.8; this follows a 2.1% increase in the March 03 quarter. The 12-month increase (June 02 to June 03) stands at 10.2%.

2. The Index for houses stood at 208.2; up by 2.9% from the March 03 quarter, while the Index for units was at 182.4; up by 1.6% from the March 03 quarter.

3. Sydney’s west and south-west have led overall price growth during the 12 month period for houses; five of the fastest growing suburbs are from these regions. Campbelltown was once again the outstanding suburb, increasing by 28.2% for the 12 months. Strathfield and Blacktown recorded the next fastest growth rates of 23.8% and 22.9% respectively. Liverpool units recorded the fastest growth rate, with an annual rate of 21.7%, followed by Blacktown and Campbelltown. This growth is predominantly due to the relative affordability of units in the west compared to other Sydney areas and the First Home Owners Grant contributing to the affordability of these properties.

4. Of the beachside localities covered, Manly units experienced the sharpest growth during the quarter while Dee Why units also showed significant increases. Houses in more established localities such as Randwick and Paddington recorded slower growth (1.8% and 1.9% respectively for the June 03 quarter).

5. The number of buyers taking up the First Home Owners Grant began to plateau over the June 03 quarter. Units in Bankstown and Campbelltown have been particularly affected, showing negative growth rates of -1.5% and -5.1% respectively in that period.

6. The McGrath APM Index forecasts Sydney property prices to increase from June 03 to June 04 by between 7.9% and 11.0% for houses and between 5.7% and 6.5% for units depending upon the impact of the numerous factors that are evaluated in the Index. The biggest of these factors are the slowing of the First Home Owners Grant and interest rates which, for the purpose of this Index, we have figured in only a 0.5% increase (including the recent 0.25% increase) from June 03 to June 04. Should interest rates increase by more than this figure or if the market factors continue to shift as they have been in the very recent weeks then the final figure is likely to be at the bottom end of these ranges if not even lower.

The previous McGrath APM Index quarterly update predicted price movements with the forecasts and actuals reported below:

Fastest Growing Localities – March 2003 to June 2003