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Australian House Prices Fall As Higher Interest Rates Loom


Australian house prices have fallen as people anticipate price growth to stall if the Reserve Bank raises interest rates in the near future.  The national median house price for August fell by 0.2 per cent, RP Data-Rismark calculations showed, with the nation’s city average dwelling price dropping from $465,000 in July to $457,000 over the preceding month.

House prices in Australia had risen for 17 straight months to June, 2010, before a decrease in house sales combined with higher interest rates led to a fall in growth. The Reserve Bank has been steadily lifting the official interest rate since October of last year, with experts predicting another 1.5% of rate rises by the end of 2011, bringing the current cash rate of 4.5% up to 6.0% over the coming year.

Rismark’s Managing director Christopher Joye recently said, “Following hawkish RBA remarks, economists are now predicting we’ll get four to six cash rate hikes … we are not forecasting any further capital growth in the second half of 2010.”

If predictions are correct and interest rates do increase to 5.5% or even 6.0% by the end of 2011, Mr. Joye said house values would experience a modest decline in value. However, he was quick to add, “This is not a bad thing. Asset prices cannot always rise – the volatile sharemarket regularly subjects investors to savage swings.”  Mr. Joye also remarked that all RBA-based sudden rate rises since 1993 had been accompanied by lower or stabilised home prices. “If the RBA aggressively raises rates, there is no reason to expect 2010-11 to be any different.”

RP Data figures show over the three month period ending in August, 2010, Melbourne’s house prices dropped 1.5% down to an average price of $470,000, while Sydney’s gained a paltry 0.2% to reach a median price of $505,000. Brisbane’s average home price fell 2.3% to $434,000, while Perth’s home dropped a substantial 4.8% to $460,000.

The fall in Australia’s house values comes just as the international community has begun to analyse the sustainability of our local housing market. After repeated queries, the credit rating agency Fitch has recently decided to start a new ‘stress test’ of the Australian mortgage market, while the Commonwealth Bank’s chief Ralph Norris has begun travelling around the globe to ensure overseas investors the Australian real estate market is not a ‘bubble’.

Meanwhile, renowned US economist Dean Baker has just stated Australia’s 38% increase of capital city home prices since June of 2006 was heading towards a bubble burst. On the other side of the coin, the Reserve Bank has argued against the existence of a real estate bubble effect.

Australia’s house prices have fought against the international trend of other Western countries like the USA, United Kingdom, Spain and Ireland whose home values have crashed in double-digit numbers since the Global Financial Crisis hit. The reason for Australia’s strength thus far? The answer could lie in a growing population and a physical shortage of affordable houses for people to move into.

Differing opinions on the matter rage onwards. Investment bank Goldman Sachs believes Australian homes are currently overvalued by up to 35%, while the highly reputable Economist magazine’s July issue published an article saying the Australian real estate market was the most overinflated on Earth.

Information accurate at publish date: 8 June, 2016.

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