Tuesday, November 09, 2004

Housing falls: rates on hold (Australia)

David Uren, Economics correspondent

The Australian

THE downturn in housing markets is getting steeper and spreading beyond Melbourne and Sydney to other capital cities, ensuring that interest rates will remain on hold well into next year.

The Reserve Bank of Australia yesterday sought to dispel suggestions there might be a rate rise before Christmas, saying it saw "no pressing need for higher interest rates at this stage". The RBA's latest review of the economy shows that inflation is in check and the bubble in the housing market has been pricked.

Despite the uncertainties created by high oil prices, the RBA said it expected favourable economic growth to continue.

The latest review of the economy shows that house prices fell sharply between July and September.

Across Australia, prices fell between 4.8 and 5.7 per cent in the September quarter.

Treasurer Peter Costello yesterday welcomed what he described as a "plateauing" in the housing market.

"It appears as if we are now getting an adjustment in relation both to prices, credit and also in relation to building approvals," he said.

A Commonwealth Bank survey shows that prices in Sydney have fallen by 15 per cent this year, while Melbourne house prices have dropped by 11.3 per cent.

Prices in Canberra, which until June this year had remained firm, are now down by 10.7 per cent, while Perth (5.6 per cent) and Brisbane (4.4 per cent) have also recorded falls. The Adelaide market has fared best, with its prices down by only 1.8 per cent.

A rival survey conducted by Australian Property Monitors shows broadly the same results, but with a sharper fall in Melbourne than Sydney. Other surveys quoted showed less dramatic falls in Melbourne, Sydney and Brisbane.

The RBA described the fall in the housing market as "orderly" and said it did not pose a risk to broader economic activity.

It said, however, that there did not appear to be much risk there would be a renewed upsurge in the housing market at present.

The RBA said lending for houses had fallen more rapidly than it had expected, and that people might be repaying debts and borrowing less against their house for other purposes.

Although the growth in household debt levels has slowed in the past six months, people on average still owe about 17 per cent more than they did a year ago.

As a result, people are now paying 9 per cent of their incomes to service debt, a level that is expected to increase further over coming months.

There has so far been no sign of any jump in personal bankruptcy rates or housing loan arrears.

The RBA suggests that the easing of house prices since late 2003 will make people less keen to spend on the basis of their housing wealth, with more restraint on overall domestic consumption.

The central bank says there has been some fall in the pace of consumption since June, although retail sales are volatile because of the timing of government payments to households – such as the second special $600-per-child family payment.

The RBA says inflation remains low, although there are some signs of upwards pressure. It reiterated the view expressed in its August review of the economy that it would be surprising if interest rates did not have to rise "at some stage of the current expansion".

Mr Costello noted that the economy had been expanding for many years, and that investors could see changes in interest rates over such a long period. But he stressed that the consumer price index remained well within the Reserve Bank's target of 2-3 per cent.

The Reserve Bank supported its comment that there was no pressing need for a rate rise with an analysis of specialised financial market instruments that built in assumptions about the likely direction of rates.

At budget time this year, financial markets expected the cash rate by March 2005 to be 0.5 per cent higher than it was now. Since September, however, the markets had come to the view that the current rate of 5.25 per cent would continue at least until the middle of next year.

The Reserve Bank said financial markets supported its overall view that the economy should continue its healthy growth, with no expectation of an economic slowdown next year.

The increase in oil prices was a risk to the economy if it were sustained. It noted that the impact on inflation in the US so far had been surprisingly modest and oil had had no impact on inflationary expectations in Australia.

Markets expected oil prices to have a bigger effect on economic activity than inflation overall.

The Reserve Bank noted that the effect on economic growth was reduced for Australia because other commodity prices also were rising, strengthening Australia's terms of trade, and providing a stimulus to incomes and spending.

The strength of Australia's commodity exports is the cause for the recent rise in the value of the Australian dollar, which has climbed from 69c to 76c over the past six weeks.

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