Australia's new 'two-speed economy' sees property prices diverge

Reserve Bank keeps benchmark interest rate at a record low, as prices surge along Australia's east coast and decline in remainder of the nation

PUBLISHED : Wednesday, 05 November, 2014, 6:25am
UPDATED : Wednesday, 05 November, 2014, 6:25am

Australia's property market is showing signs of a new two-speed economy.

Prices along the nation's east coast are still surging, while the rest of the country declined last month, RP Data's CoreLogic Hedonic Home Value Index showed Monday.

The housing market has been pumped up by the Reserve Bank of Australia keeping its benchmark interest rate at a record-low 2.5 per cent for 15 months, with home loans to property investors in September growing at the fastest since 2008.

Demand for higher-risk mortgages, including interest-only loans, have prompted regulators to review tools to cool lending and avoid a jump in loan delinquencies.

The data "highlights the issues facing policymakers in attempting to cool a very diverse housing market," said Savanth Sebastian, an economist at a unit of Commonwealth Bank of Australia. "It would be more encouraging if price gains across the nation were more uniform."

Monday's report showed prices jumped 1.3 per cent in Sydney in October and were up 13.1 per cent from a year ago. Prices rose 1.9 per cent in Melbourne and 0.6 per cent in Brisbane.

In contrast, they fell 2.3 per cent in Canberra, 2.4 per cent in Hobart, 1.1 per cent in Adelaide, 0.4 per cent in Darwin and 0.1 per cent in Perth. Across all capital cities, prices rose on average 1 per cent, RP Data said.

Australia's two-speed economy reached its pinnacle in the third quarter of 2011, when the nation's terms of trade peaked, the currency climbed above US$1.10 and the key interest rate was at a developed-world high of 4.75 per cent. The bonanza of investment in iron ore and coal mines meant states in the north and west boomed, threatening to accelerate inflation, while the south and east stagnated.

Between late 2011 and August 2013, as resource investment started to cool, the RBA cut rates by 2.25 percentage points to encourage residential construction and soak up mine workers. That set off a property buying spree, particularly from investors who could access tax benefits.

The RBA indicated from mid-September this year that regulators planned measures to target speculation by people buying residential property as investments. That was a U-turn on past dismissals of macroprudential measures, including governor Glenn Stevens' description of them in August as an "international fad".

The central bank yesterday kept interest rates at record lows after its latest policy meeting, a decision that came as no surprise to economists and markets.

While the heightened rhetoric from policy makers has seen some slowing in house price growth, other measures remain strong, according to RP Data.

"Auction clearance rates continued to hover around the 70 per cent mark week-to-week while volumes across RP Data real estate agent and valuation platforms remained strong, which is indicative of heightened levels of industry and mortgage market activity," said Tim Lawless, head of research at RP Data. "The number of new properties listed for sale continues to rise as are total listing numbers."