The good news for first home-buyers is that house prices are set to fall. The bad news is that that the bottom end of the market won’t see too much change, with falls concentrated in the higher end and those areas popular with investors.

This bearish prognosis is based on the simple observation that shares, commercial property, residential property and other investment assets such as artwork are correlated, and that you don’t get a collapse in one market without that impact being felt in the other markets.

In fact, both shares and commercial property have tanked. From its high on 20 February of 7163, the sharemarket has lost almost 31%, with the S&P/ASX 200 closing last night at 4953. Commercial property has been one of the hardest hit sectors on the ASX. Over that same period from 20 February, sector leaders such as Dexus has lost 25.3%, GMG 31.9%, GPT 34.8% and the Scentre Group (which owns the Westfield shopping centres) is down by a whopping 51.7%. Pure play commercial office fund, Centuria Office REIT, has shed 35.1%. This is carnage!

Residential property, on the other hand, is still performing well. Last week’s auction clearance rate (according to Core Logic) was a relatively strong 70.6%. Although down for the second week in a row, it was still up massively on the 51.4% clearance rate recorded for the corresponding week in 2019. That was right at the time when investors were worried about the prospect of a Bill Shorten Government, and APRA’s mini credit squeeze was still to unwind.

Since the election last May, residential property has witnessed a huge recovery. According to Core Logic, Sydney home prices rose by 1.7% in February, 4.6% over the last 3 months, and 10.9% over the last 12 months. The median dwelling price is $873,000, with the median house price back over $1 million. The Sydney market is only 3.7% below its all-time peak. But the other capital cities are even hotter!. Apart from struggling Perth, Melbourne is just a breath away from its peak, while Adelaide, Brisbane, Hobart and Canberra recorded new peaks in February.

Interest rate cuts have helped the residential property market, and it looks like we will get another cut today when the RBA slashes the cash rate to just 0.25%. Mortgage rates starting with big figure ‘2’ (and there may even be some special rates starting with a ‘1’) are going to support the market, keeping demand from first home-owners strong.

But interest rate cuts aren’t going to help investors and retirees who have seen their share portfolios slashed by 30% or more, or help those who have borrowed to invest in shares and are forced sellers to meet margin calls.

And they are not going to help those canny investors who look at both commercial property and residential property, and recognize that with price drops of 30% to 50%, the former is starting to look pretty attractive.

And lower interest rates are not going to provide much relief to the hundreds of thousands of people involved in the tourism, hospitality, airline, recreational and service industries now worried about whether they will have a job or their small business will survive the shutdown of the economy due to the Coronavirus. Homeowners and investors, the last thing they will have on their mind is buying property and unfortunately, some will now be thinking about selling.

It only takes a small change in demand (less buyers or less keen buyers), or a small change in supply (more properties or keener sellers), to impact prices. Remarkably, the residential property market hasn’t been impacted, yet, but this is because it has been so rapid in the other markets and the residential property market always moves more slowly.

However, catch up it will.

For the record, I am  a “glass half full” guy when it comes to residential property. It is not going to collapse – but a pullback in the order of 5% to 10% is on the cards, particularly for those residences that are typically purchased by investors. And if the Government’s measures to stop the spread of the Coronavirus work and things are back to normal within a couple of months, this pullback might just be a blip.

But, if I was a seller, I would be looking to close this weekend, and if a buyer, keep my wallet firmly in my hip pocket.