House prices fall

And interest rates expected to fall further

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The value of capital city homes have fallen 1% in October, following four months of rising values. That’s according to a report by RP Data-Rismark, released today.

Sydney, Melbourne and Brisbane all fell by around 1%. Hobart was the worst performer, losing 4.5% over the month, while Darwin added 4%. If you own a house in Darwin, you should be cheering – house prices have risen 8.6% since last year, while the city also recorded the highest rental yields of 5.9% gross for houses.

Property investors in Melbourne won’t be happy. The city’s gross rental yield averages just 3.6% for houses, while units return 4.5%. That’s one of the reasons why we prefer to invest in shares, which have historically outperformed all other asset classes after-tax over 20 years.

RP Data’s research director Tim Lawless, said that the weak October results highlight how delicately balanced the Australian housing market is. Despite the cash rate being only 25 basis points higher than emergency lows set in 2009, he said that Australia is yet to see a real improvement in consumer confidence or housing market transaction volumes. A recovery in the housing market appears likely to remain fragile.

Related: Weak housing market claims another victim

Companies supplying building materials, such as Boral Limited (ASX: BLD), Adelaide Brighton Ltd (ASX: ABC), Brickworks Limited (ASX: BKW) and Fletcher Building Ltd (ASX: FBU) are all down in trading today. This is not good news for the sector, which was looking for lower interest rates to help boost housing construction activity, but it may be good news for first home buyers, looking to get into the housing market.

The Reserve Bank of Australia has cut interest rates by a total of 1% already this year – a further cut may come as early as next week, with most economists predicting a 0.25% cut in official interest rates on Melbourne Cup Day. We may also see more cuts next year.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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