Australia house market strong despite high rates

PUBLISHED : Wednesday, 05 March, 2008, 12:00am
UPDATED : Wednesday, 05 March, 2008, 12:00am

The spectre of rising inflation and interest rates have done little to dampen the Australian property market, as yet. But another interest rate rise from the Reserve Bank of Australia this week - the third in six months - will cause more pain in the Australian mortgage belt and could have a flow-on effect to the property hot spots.

The Reserve Bank's cash rate is now at 7.25 per cent, a 13-year high, and mortgage rates are likely to nudge 9 per cent.

Despite this changing economic environment, the Australian housing market delivered double-digit returns last year, with the national rise a significant 12.3 per cent.

The best performing capital city markets were Brisbane, where prices surged by more than 21 per cent, and unheralded Adelaide with 18 per cent.

Perth, which had been the market darling of 2005 and 2006 as the resources boom pushed prices higher, was the worst performing with a rise of only 1.1 per cent.

The figures, however, are deceptive. They mask a two-tier market where prices in outer suburban mortgage belt areas, largely unserviced by public transport, are in free fall, while established inner city suburbs of Sydney and Melbourne have continued to climb sharply.

As the rates have risen, stories profiling streets where people are selling houses and taking major losses have become commonplace.

And at the same time wealthier people, particularly in Sydney where people are more highly leveraged, are being forced into selling their beach houses and holiday homes.

On the mid-north coast of New South Wales, within a couple of hours' drive of Sydney, property agents report that prices have fallen by between 10 and 20 per cent over the past 18 months, with unit prices feeling the crunch. 'Look at the share market, there are a lot of margin calls happening,' said RP Data's Tim Lawless, referring to the falling share market and its impact on property.

He observes a phenomenon where people who have often borrowed heavily to invest in shares in the recent booming share market are having to sell property to cover their payments on plummeting portfolios. 'There's a bit of a move to put that luxury item on the market and get a bit more liquid.'

Meanwhile, at the top end of the market for established homes, house prices are rising at their fastest rate since the end of the housing boom in 2003. Closely held suburbs such as Glebe and Annandale in Sydney's inner-west are continuing to see double-digit rises with people increasingly wanting to move close to the centre of urban action.

This is kick-starting a likely resurgence in the Sydney market, which is the traditional leader in Australia but has been outpaced by other cities in recent years.

'Sydney is showing healthy signs of a recovery after a time of stagnant growth after the last boom abruptly ended with two successive rate rises in 2003,' says Louis Christopher, head of property research with Adviser Edge.

For investors, the turbulence has seen the return of the apartment market, which was flat earlier in the decade as a result of a glut. With rents on the rise everywhere, and many younger people locked into renting, the inner-city apartment market is at its most buoyant in several years.

'Displaced would-be homeowners and university students pushed up gross rental returns for apartments in Ultimo, Pyrmont and Chippendale to above 6 per cent over the last year,' says Michael McNamara from Australian Property Monitors. 'We recommend areas with strong local economies that attract young renters with lifestyle, education and employment.'