As Aussie Housing Goes...

Prices are falling, and that may signal property trends elsewhere

Are the good times over for Australia's red-hot real estate market -- and if they are, what does that mean for the housing boom elsewhere in the developed world? For the past eight years, low interest rates and a healthy economy fueled a housing boom that brought many first-time home buyers into the market and spawned a new generation of property millionaires. But Australians are now worried that the rally in residential real estate prices has peaked. The cause: a series of interest rate hikes in recent months. There are already signs that demand for housing is leveling off. "It's getting tougher in the apartment end of the market," says Melbourne real estate agent Michael Amarant. "[The situation] has certainly changed since we had the interest rate hits."

Interest rates, of course, are expected to rise across the developed world in coming months. In the U.S., the Federal Reserve may hike rates as early as the end of June. So Australia's experience could presage how higher rates will affect booming housing markets in the U.S., Canada, Britain, and other European countries.

In Australia the median house price in Sydney jumped from $138,141 at the end of 1995 to $359,165 today, while the median price in Melbourne leapt from $102,224 to $252,797 over the same period. But prices in Sydney fell 7.5% in the first quarter of this year, according to the Australian Property Monitors research group. In Melbourne the decline was more severe, with a drop of 12.9%. Industry experts blame the rate hikes. While the increases were small, "they were certainly enough to draw the attention of investors," says APM research director Louis Christopher.

Complicating the picture is the difficulty in getting comprehensive nationwide data, with Australian Bureau of Statistics reports lagging the actual sale of properties by six weeks. The bureau's most recent report, for example, was based on house sales between November and February. The lack of reliable real estate market data is such an acute problem that the head of Australia's central bank has complained openly about it. "The information we have on [property] prices is hopeless," Australian Reserve Bank Governor Ian J. Macfarlane told Parliament on June 4.

Many economists have no doubt that the Reserve Bank's decision to cool the economy by hiking interest rates twice in the past eight months has taken the froth out of the housing market by boosting borrowing costs. On June 2, the central bank kept its benchmark rate unchanged at a three-year high of 5.25%, where it has been since December. And with rates up, high-priced real estate is becoming less attractive relative to some fixed-income investments. "In some cases you'd only get 3% to 4% as an initial yield, then you shave off 1% for maintenance [and other] fees," says Angie Zigomanis, a project manager at Sydney property monitor BIS Shrapnel. "With a 2% to 3% net return, investors "would have been better off in a 5% [bank savings] deposit."


Despite the slowdown -- and foreboding headlines in local tabloids -- few analysts are predicting a collapse in property prices. Economists note Australia's economy remains strong, employment levels are high, and rates are still low by historical standards. But that also makes it hard for the central bank to consider pushing rates back down anytime soon. Still, mortgage rates will climb about 0.25 of a percentage point at most, and housing prices will fall no more than 10% to 15%, predicts Justin McCarthy, a senior economist with Westpac Institutional Bank in Sydney. "It will be similar to previous cycles. There'll be a five-year period where prices struggle," he says.

Could that mean a five-year hiatus on price rises in other markets? Probably, say some real estate experts Down Under. If Australia is a barometer, the time when homeowners could expect double-digit annual returns on their homesteads may be over.

By Patrick Gray in Melbourne

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