House prices fall again in January

House prices have fallen again in January, adding to the decline over the past few months.

According to Corelogic, Sydney prices fell by 0.9% and Melbourne prices fell by 0.2% in January. This means that Sydney prices have now fallen by 3.1% over the past six months.

Corelogic head of research, Tim Lawless, said “While January may deliver additional noise in the indices results, the negative monthly result lines up with recent months, which showed a softening trend, particularly in Sydney and, to a lesser extent, Melbourne”.

“In the absence of a catalyst to reinvigorate the market, such as lower mortgage rates or a loosening in credit policies, we expect to see a continuation of softening conditions across these markets”.

Tim Lawless makes a good point. There were a number of drivers helping prices in the past that have now disappeared. Mortgage rates had been getting lower for decades, now they’re going up. Foreign buyers were buying up a lot of property, now there is a lot less activity. Banks were lending with much higher loan to value ratios and less financial details of borrowers, now things are more stringent. The government recently announced that it would remove some of the deductions claimable for property investors.

Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) have made a killing from property lending. Now the banks will have to hope this doesn’t turn into some investors defaulting due to cashflow issues.

Mr Lawless said “With financial markets forecasting a 25 basis point lift to the cash rate before the end of 2018, there is an increasing chance of mortgage rates my lift this year”.

“Even if the cash rate were to remain stable, there is the potential mortgage rates could be adjusted to higher due to increased bank funding costs in the capital markets or in order to fulfil APRA’s local implementation requirements”.

Foolish takeaway

I wouldn’t be feeling confident if I were a negatively-geared property investor at the moment. House prices could keep slowing heading downwards for the next year or two as interest rates rise and the unaffordability of housing hurts prospective first-home buyers, who prop up the bottom of the market.

I’d much prefer to invest in shares such as these top stocks over residential property right now.

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