Wednesday, November 3, 2010

House price growth hits a wall

Chris Zappone

Australia’s house price growth slowed to a crawl in the three months to September, amid higher interest rates and worsening affordability.
The weighted average of eight capital cities rose just 0.1 per cent in the third quarter, following a downwardly revised 2 per cent increase in the second quarter, the weakest since the March 2009 quarter.
Home prices rose 11.5 per cent in the year to September, slowing from a downwardly revised 16.3 n 18.4 per cent jump in the year to June, the Australia Bureau of Statistics said today.
Analysts had predicted no change to the quarterly prices and a 13.4 per cent rise in the annual figure.
Shortage keeps prices up

“It suggests the housing market has come off the boil,” said St George chief economist Justin Smirk. “House prices are tracking sideways and perhaps softening a little bit.

“House prices really haven’t gone anywhere, affordability is stretched and if that was the only issue, house prices would probably fall right now,” said Mr Smirk.
But the shortage of supply balanced against the weaker outlook for housing was holding prices steady, he said.
Mr Smirk noted that ABS data tended to lag the private measures such as RP Data, he said.
Revisions under fire
But Westpac senior economist Matthew Hassan said he was surprised by the scale of the revisions, saying it cast doubts about the quality of the measure.

Initially the ABS had reported a 3.1 per cent increase for the June quarter and an 18.4 per cent annual increase.

“This is one the key metrics overseas commentators have drawn on to point to overheating in the Australian housing market,” he said. “When you see the scale of these revisions, you do wonder if the data is helping in the debate or adding to the confusion.”

Mr Hassan’s comments come days after the International Monetary Fund warned that Australia’s house prices might be overvalued. Jeremy Grantham of US investment fund GMO last week also reiterated his view that the local house prices were in the grip of an asset price bubble.
Reduced offshore demand

ANZ chief property economist Paul Braddick said ABS figures on capital city home prices have overstated both falls and rises in home values in the past four years.

“First-home buyer activity has returned to ‘normal’ levels and the retightening of Foreign Investment Review Board rules and the strong Australian dollar have reduced offshore demand,” he said.

FIRB rules were temporarily loosened during the financial crisis, helping to drive up demand for local homes by overseas investors, and then were subsequently tightened before the federal elections this year.

Nonetheless, Mr Braddick said rising interest rates have seen housing affordability weaken. ANZ estimates an underlying demand of 180,000 houses but predicts only 150,000 will be built.

“Further rate hikes in 2010-11 will hurt affordability and maintain a cap on prices,” Mr Braddick said.

Rates tipped to stay on hold

Analysts are divided on whether the Reserve Bank will lift interest rates tomorrow, although the market is currently pricing in a one-in-four chance.

The Reserve Bank meets tomorrow to decide whether to lift interest rates from the 4.5 per cent level they have been since May. The market currently rates a 22 per cent chance of a rate rise tomorrow.

The run-up in house prices has eroded housing affordability in recent years, making the goal of homeownership more remote for many younger Australians, analysts say.
The median city home price stands at $455,000, according to RP Data-Rismark.
Prices rise in Melbourne

House prices rose 2.7 per cent in the quarter in Melbourne, the slowest growth on the past 18 months, while they fell 0.9 per cent in Sydney, the first decline since the March quarter 2009.

For the year, they jumped 18.8 per cent in Melbourne, while posting a more modest 11 per cent gain in Sydney in the same period.

House prices rose 0.4 per cent in Perth and 0.3 per cent in Darwin in the quarter.

However, Brisbane house prices fell 2.1 per cent, while in Adelaide they slumped 1.4 per cent, a fall matched in Hobart. In Canberra, house prices slid 0.4 per cent, the ABS said.

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