More evidence is in that Australia's property market is headed for a fall.
Thanks in part to Westpac Banking Corp (ASX: WBC) rasing interest rates for all its customers by 0.2% last week, auction clearance rates – a key indicator of the housing market direction – have slumped.
Over the weekend, Sydney auction clearance rate plummeted to 65.1%, according to Domain – a three year low. In May this year, it was closer to 90% and 70% just last week. Melbourne bucked the trend, with auction clearance rates rising 2% to 74%, but are still down from the high 70s.
Reports from real estate agents suggest that in some part of Sydney, prices have already dropped by $100,000.
AMP Capital chief economist Shane Oliver has told Domain that he thinks buyers are worried the other banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) will follow suit. And they are likely to be right.
The big four banks tend to stick together, unless they use Westpac's move to try and steal market share. However, with all four forced to raise significant amounts of capital, home loan customers are an obvious target to maintain revenues and earnings.
Previous action by the big four to limit and slow lending to investors is also having an effect as we've mentioned previously. In early October, Corelogic RP Data reported that investment credit growth had fallen to its lowest monthly increase since October 2013.
The thing to watch is when auction clearance rates fall below 50% for Sydney, 55% for Melbourne and 35% for Brisbane, according to Macquarie Group Ltd (ASX: MQG). The investment bank notes that in previous cycles, falling house prices have been triggered by sustained increases in mortgage rates.
That is a clear indicator that housing prices to fall. In 2011, Sydney property prices fell by 10% after the RBA raised the official cash rate 4 times, including 3 months in a row in early 2010.
Home loan borrowers are unlikely to get a reprieve from the RBA either in November. The central bank next meets on Melbourne Cup Day, and most economists expect the bank to keep rates on hold for the sixth consecutive month. The RBA last reduce the official cash rate by 0.25% in May 2015.
Foolish takeaway
If the big four banks continue to raise capital, more interest rate rises could be on the cards, adding further downward pressure on house prices.
