Analysts warn that another interest rate rise may lead to a rash of defaults from homeowners Just as the Sydney property market's decline seemed to be over, the Reserve Bank of Australia has announced an interest rate rise, and with economists tipping another one before the year is out, the real estate scene might be heading back into the doldrums yet again. Sydney has traditionally been the leader in Australian home market but since 2002 it has flatlined and been overtaken by other cities, particularly Perth and Darwin, as the place to make profits from property. In Perth, for example, the ongoing mining and commodities boom has fuelled an unprecedented upswing in the residential property market, with analyst group Australian Property Monitors (APM) reporting that the city's median house price jumped almost 37 per cent in the last year to A$455,000 (HK$2.7 million). Over that period Sydney prices showed their biggest increase in three years, but still only rose by 1.3 per cent. At A$523,000, however, Sydney has the highest median house price of all Australian cities, although Perth seems to be catching up rapidly. The good news for Sydney, and for the rest of Australia, may have been dampened by the central bank's announcement of a quarter percentage point rise in official interest rates, which now sit at 6 per cent. If the central bank acts to curb inflation again with another rise by the end of the year - making three over the course of 2006 - analysts say that is likely to send the property market back into a tailspin and lead to a rash of defaults from over-leveraged investors and homeowners. 'We believe the modest recovery in the national housing market that has been occurring in the first half of 2006 will probably stall in the second half of this year,' APM research director Louis Christopher said, even before the interest rate rise. Mr Christopher predicts that if the central bank were to raise rates again, and take the official rate beyond 6 per cent, then prices in Sydney could fall 10 per cent, and by 5 per cent in Brisbane and Melbourne. 'That will be the point, we think, where defaults will rise rapidly,' he said. Across Australia there are 2.5 million households with mortgages, and they are currently spending a record 25.6 per cent of their income on debt repayments. The quarter point rise in official rates, which is already being passed on to homebuyers, will add A$36 a month to the average loan repayment, bringing it to A$1,658. Other forecasters are not quite as downbeat. According to the BIS Shrapnel group, a further rate rise would only result in a 2 per cent fall in Sydney prices. The silver lining for investors is that due to a slowdown in the sale of new houses - which is crippling the once-buoyant building industry - rents are forecast to rise sharply. BIS Shrapnel predicts that tight rental vacancy rates in Sydney could push rents up by as much as 40 per cent over the next four years.