Australia’s residential property market will not withstand another interest rate rise but the commercial property sector will continue to grow, according to the latest Australian Property Institute’s survey.
According to the API’s biannual property directions survey, 97% of respondents believed the recent interest rate rises in May and August, which pushed rates up to 6%, had a moderate to negative impact on the residential market.
However, cases are emerging of home owners whose mortgages have exceeded their property values. (Read Australian Property Journal: Negative equity returns to haunt market http://www.propertyreview.com.au/index.php?id=1717.
API’s research committee chairman Phil Bennett said recent interest rate increases following a period of relatively low rates were also impacting housing affordability.
"An increase of low rates is far more significant than an increase of high rates. For example, a one percentage point increase on a 10% rate would equal 10% of the rate’s value.
“However, an increase of the same amount on a 5% rate would be worth 20% of its value. It starts to impact on the affordability of housing in that people can no longer afford to borrow the same amount of money." he added.
API’s New South Wales president Tom Webster said the survey found a majority of respondents see interest rates increasing in the short term and have identified rising interest rates as a significant factor that could adversely impact on the recovery of residential property.
“Higher borrowing costs as a result of higher interest rates had started squeezing people out of the property market, with many finding that their property was now valued less than when they bought it. We’ve seen an increased number of sales of properties by mortgagee in possession, where people went into properties four, five, six years ago, which now are probably in negative territory.
"When we do have more mortgagee in possessions, then that has an impact on the market – the market sort of comes back down a bit,” Webster said.
Meanwhile, the survey of industrial professionals including valuers, fund managers, analysts and financiers found that the residential property market downswing in Sydney, Melbourne and Brisbane was expected to continue throughout 2007, with signs of improvement creeping through in 2008.
Industry professionals believe the Perth market will continue to perform as a result of the resources boom.
According to the survey, 78% of respondents predicted interest rates to either remain steady or fall over the next three years.
Meanwhile, higher interest rates are unlikely to affect the commercial property sector. According to the survey, the market is expected to grow over the next two years.
This is supported by commercial property agents who were surveyed by Australian Property Journal in August this year, following the latest interest rate hike.
NAI Global Melbourne’s managing director Ross Mercorillo said the 0.25% rise is unlikely to have an affect on businesses and investors in the commercial property sector.
Mercorillo said a 0.25% or even 0.5% interest rate rise will not make a difference to the sector and confidence still remains, particularly in the industrial property markets.
“Investors should factor their commercial property investments on a 9% interest rate – just in case of a rainy day. If an investor or business is worried about a 0.5% or 1% interest rate rise, then the should not be investing at all.” Mercorillo concluded.
Knight Frank’s national director of research Matt Whitby said the combined impact of the two recent interest rate rises will not affect demand for investments, who added that in the office market, all underlying fundamentals are positive.
“Industrial land values have already flattened in recent months due mainly to the reduced demand from owner-occupiers and the upward trend in interest rates will ensure land values will plateau,” he added.
Jones Lang LaSalle’s industrial director Matt Herrett said the commercial property market is focused on the underlying fundamentals at play, including the high demand for investment-grade property and the shortage of supply, expectations of rental growth and capital appreciation.
“This being said, the 50 basis point rise in interest rates over the past three months and the likelihood of another 25 basis points before year end, will ensure the 10 year bond yield moves in an upward direction with it over the next 6-12 months,” he added.
Yesterday, Webster said the increased rates are seen as having no impact to a moderate adverse impact on commercial and industrial property.
According to the survey, Sydney and Melbourne have the greatest commercial sector growth potential in the next two years, with the upswing forecast to peak in 2008.
Brisbane‘s commercial sector is nearing the end of its commercial upswing, which is expected to peak in 2007.
By Kathryn O’Meara
