Australia Home Prices Drop 3.7% as Banks Doubt 2012 Rebound on Rate Cuts

Home prices in Australia’s eight capital cities slid 3.7 percent in the first 11 months of 2011, extending the biggest drop in at least 12 years on concerns Europe’s debt crisis may damp the nation’s economic growth.

Brisbane led the decline, slumping 7 percent in the January-November period, followed by Melbourne, which posted a 5.7 percent retreat, according to figures from RP Data, a real estate researcher.

“The downside risk would come from global weakness affecting the Australian economy,” said David Cannington, a Melbourne-based economist at Australia & New Zealand Banking Group Ltd. (ANZ), with A$161 billion ($164 billion) of mortgages as of November. “The housing market will, broadly speaking, reflect the relative strength or weakness of the Australian economy.”

Economists at the nation’s four-biggest banks, which hold 87 percent of mortgages, said the central bank’s interest rate cuts won’t be enough to offset concerns about Europe’s crisis or spur a rebound in the housing market. Home loans rose 5.7 percent in the 12 months through November, matching the weakest annual pace since 1977, central bank data showed today.

Home prices dropped 3.5 percent in November from a year earlier after falling 3.9 percent in October, the biggest slide since RP Data began keeping records 12 years ago. Brisbane had the biggest decline last month, down 7 percent, followed by Melbourne with 5.6 percent. The Reserve Bank of Australia cut interest rates for the second straight month on Dec. 6.

First-home Buyers

First-home buyers, who are more sensitive to changes in interest rates, are already responding to the central bank’s monetary policy easing, while buyers of luxury properties remain on the sidelines, said James McIntyre, Sydney-based economist at Commonwealth Bank of Australia (CBA), the biggest mortgage provider, who forecasts another 25 basis-point cut in rates in February.

First-time purchasers accounted for 17.9 percent of dwellings financed in October, up from 16.4 percent in September, according to statistics bureau data.

Prices in the top 20 percent of suburbs, which peaked in August 2010, fell 7.3 percent in October from a year earlier, according to RP Data.

“The nature of the transmission of the euro-zone crisis is that it’s coming through financial flows into the Australian economy rather than through real economic impacts,” McIntyre said. “Those financial flows are having a significant impact at the top end of the market, which has been falling at a similar rate to which it declined during the global financial crisis.”

The mortgage book of Commonwealth Bank, including its BankWest unit, totaled almost A$306 billion in November, APRA figures show.

‘Excessive Stock’

The four-biggest banks -- ANZ Bank, Commonwealth Bank, National Australia Bank Ltd. (NAB) and Westpac Banking Corp. (WBC) -- had outstanding housing loans worth almost A$927 billion in November, according to bank regulator, the Australian Prudential Regulatory Authority.

The estimates from the economists range from a 2.5 percent increase in home prices next year to a 2.5 percent decline.

Sydney will have the biggest gains when the market turns around in the middle of next year, while Melbourne, which has “excessive stock” on the market, won’t see prices recover until at least the third quarter, said Louis Christopher, managing director of housing data provider SQM Research Pty.

Properties listed for sale in Melbourne surged 47 percent in November from a year earlier, compared with a 16 percent rise in Sydney, figures from SQM show. Home prices fell 0.5 percent in Sydney in November, the smallest decline among the eight capital cities, according to RP Data. They fell 1.1 percent in the year to November.

Subdued Response

The Australian government in October 2008 doubled a grant for first-time buyers of existing homes to A$14,000 and tripled it for buyers of new properties. The move helped push prices up 13.6 percent in 2009.

Matthew Hassan, Sydney-based senior economist at Westpac, forecasts two 25-basis-point cuts, in February and May.

“The lower interest rates, without the additional measures we saw in 2008 and 2009 targeting first-home buyers, will see a response, but a fairly subdued one,” he said.

Home prices in the nation’s capital cities rose 4.7 percent in 2010, according to RP Data. Building approvals plunged 29.8 percent in October from a year earlier, the steepest drop since January 2009, according to a statistics bureau report.

Consumer confidence in Australia fell in December to a four-month low as concern mounted over rising unemployment and the fall-out from the crisis. The country is headed for its worst year of jobs expansion in 15 years, with payrolls on pace for the smallest growth since 1996.

“Overall, we anticipate that the soft conditions are likely to persist,” RP Data’s Kusher wrote. “ The availability of credit is likely to remain tight, consumer confidence is likely to remain volatile and who knows what will happen in Europe and the U.S.”

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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