Menu

0.25% rate cut: not quite the tipping point for property

June 5, 2012

Don’t expect a dramatic reaction in the residential property market off the back of this rate cut, at least not in coming weeks. There won’t be a massive jump in auction clearance rates and certainly not a spike in property prices. Instead, I anticipate the market to remain steady.

The market is finely balanced. On one side it’s been held back by weak consumer confidence off the back of international economic uncertainty. On the other side, we have reasonable local economic conditions, lower interest rates, improved affordability, and a transparent market.

If this interest rate reduction cycle continues, at some moment a tipping point will be reached when the economic and property fundamentals become so compelling that it will overcome the current inertia born from uncertainty.

Keep an eye on the gap between net rental yields and the standard variable mortgage rate. It is currently around 4%, which is its long-term average.  If this gap falls to 3% as a result of falling interest rates and steady-to-rising rents, that will be a green light signal that the property market is ‘good value.’  This may be the tipping point for a more sustained recovery.

Paul Nugent, Director, Wakelin Property Advisory