Housing bubble bursts: Reserve Bank of Australia

8 May 2004

The housing bubble has burst, with property prices falling by an average 8.4per cent in the March quarter, according to the Reserve Bank, confirming that interest rates will remain stable for months.

The bank cited preliminary private research showing house prices dropped by 14.5per cent in Melbourne and 10.5per cent in Sydney in the March quarter.
Price falls were 1per cent or less in other capitals, except in Adelaide, where they rose 2.7per cent. Based on official estimates of the value of all dwellings in Australia, an 8.4 per cent fall in housing prices amounts more than a $60 billion loss in capital value.

"A turning point has been reached in the housing market after the overheated levels of late last year," the bank said yesterday in its quarterly statement on monetary policy.

Housing Industry Association senior economist Harley Dale said all the signs were that prices had slipped on a widespread front.

"I'd be surprised if there was anyone in the industry that would disagree with the Reserve Bank view on this," Mr Dale said.

Louis Christopher, author of the research on prices quoted by the Reserve, said the price falls were being driven by a lack of borrowers.

"They're leaving the market in droves and it has forced sellers to reduce pricing expectations in auctions."

Mr Christopher, of Australian Property Monitors, said it was the sharpest downturn in the market since 1989.

He gave as an example houses in the Hills district in northwest Sydney, which are selling for as much as $100,000 less than they were fetching last year - a slide of about 15per cent.

Mr Christopher said the weakness in the market had spread beyond the apartment market, which started to slow early last year. Further falls were in prospect, with the likelihood the drop could reach 20per cent by the end of the year.

Peter Costello earlier this week told The Australian that the end of the housing boom was a risk facing the domestic economy.

The Reserve Bank said that interest rates, based on its 5.25 per cent official cash rate, were "close to normal" and that falling house prices reduced the likelihood that the economy would require further credit tightening.

The central bank said the 1percentage point increase in interest rates late last year had significantly reduced the stimulus of cheap credit to the economy.

The overheated housing market had been an important reason to shift interest rates to a "more normal" level.

The quarterly statement said housing loan approvals had peaked at about $15billion a month in October and had fallen in each of the four months to February to about $12billion.

There were signs the fall in approvals was being followed by a drop in actual home lending.

Accurate and current information on house prices is hard to obtain, because most of the surveys are based on the price at settlement, which may be months after the purchase.

However the Reserve bank said the house price index constructed by APM tracked prices at the date of contract.

Its survey shows apartment prices are also falling, with a 10.2 per cent decline in Melbourne and 3.5 per cent in Sydney offsetting rises in other capitals. The Reserve Bank said no single house price measure could be regarded as definitive. However, other indexes prepared by the Commonwealth Bank, private research firm Residex and the Real Estate Institute of Australia also showed price falls.

"The preponderance of price falls in the major cities suggests that for Australia overall, house prices declined in the March quarter," it said.

Auction clearance rates and surveys of consumer sentiment provided further evidence of the turn in the housing market. The bank said the trends in rental markets were not uniform. Rents were rising strongly in Adelaide, Brisbane and Canberra, but were flat in Sydney and falling in inner Melbourne.

The bank said the turn in the housing market was extending to new home construction, citing Housing Industry Association research that commitments for new houses were about 35 per cent below the peak last year. However, there will not be a crash. "The decline will be mild in comparison with previous housing cycles," it said. There was strong underlying demand for housing and favourable conditions in the economy generally were likely to sustain new dwelling construction.

The decline in new dwelling construction would partially be offset by the relative strength of renovation.

The Reserve does not expect the decline in the housing market to generate a broader malaise in the economy. However, it said households were more heavily indebted and saving less than ever, with interest payments consuming an even higher share of disposable income than when mortgage rates peaked at 17 per cent in the late 1980s.

By David Uren, Economics correspondent for The Australian newspaper.
Reproduced from The Australian newspaper, 8 May 2004.