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Property a bigger risk to our share market as half of Sydney auctions fail to clear

Forget the Trump trade war. The bigger threat to our bull market could be much closer to home (all pun intended).

The latest auction clearance rate from our largest city makes for gloomy reading and the Australia Financial Review reports that the Sydney market is on track to record its fourth-week this year where auction clearance rates have dropped below 50%.

The clearance rate for the week came in at 52.4% but is likely to be revised lower once properties that have failed to sell the previous three times are accounted for, according to housing research firm CoreLogic.

If that comes to pass, it would mark the weakest outcome for the Sydney market since 2012 when half of all homes on auction also failed to sell!

The weakness is likely to spread and while few experts are predicting a hard landing for the national residential market, it is disheartening to see that the pace of declines (not only in Sydney) is not slowing. This means it’s just too early to predict a bottom.

A worse-than-expected fall in home prices will have a widespread impact on our economy and share market.

Nothing will be spared and our largest mortgage lenders like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) will be among the first few to come under pressure.

Interestingly, home builders Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP) are said to be relatively insulated, at least in the nearer-term, as they have pre-sold most of their homes for the next 12-months.

But housing cycles tend to be relatively protracted (unless we see large government stimulus like we did in 2009/10 – something that is unlikely to happen this time round) so I wouldn’t buy these stocks either until I get a better sense of when the residential market will bottom.

It also won’t take long for retailers to feel the pain either. The housing market is one of the reasons why Harvey Norman Holdings Limited (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH) are lagging the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

You might think that other outperforming sectors like resources and technology will be untouched by the housing market, but don’t count on it. History has shown that if share market investors get spooked, they will sell everything to flee to the asset that provides the best protection in a meltdown – cash.

I am not saying that an escalating global trade war won’t have a devastating impact as well, but I think the trade spat will ease (click here to find out why) while the housing downturn is already knocking on our door.

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Motley Fool contributor Brendon Lau owns shares of Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.