House prices will cool

The housing price rise frenzy is about to end and those who over-extended themselves may be in for a rude shock.

Reserve Bank boss Ian Macfarlane, who issued the warning yesterday, said low interest rates were the engine behind the price gains of the past five years.

But there was no chance of prolonging the "wild excess" of the housing market because there was no lower interest rate environment to go to, he said.

"We have to concede the reason there has been this big lift in house prices is because we have moved from a high interest rate environment to a low interest rate environment," he said.

Official figures show that up to the December quarter last year, price growth in all Australian capital cities was between 15-20 per cent.

"The thing that makes it interesting is how widespread (across Australia) they are," Mr Macfarlane said.

Mr Macfarlane said the good news for renters still hoping to get into the housing market was that the trend would not go on for ever.

"We should not expect the same sort of price rises in the future," he said.

He did not expect an instant slowdown in house price growth because interest rates had risen by 0.25 per cent last month.

But some areas of the market were already slowing, particularly for inner-Sydney apartments.

"It's quite clear vacancy rates are up and people are having trouble letting them," he said.

"There is some evidence that prices are already going down in that area, which is what you would expect given the massive increase in supply."

Mr Macfarlane said the Reserve would not allow the housing nightmare that England went through in the late '80s to be repeated in Australia.

In England, many ordinary householders went broke because of an interest rate rise coupled with a housing price slump.

But he said the at-risk group in Australia were those who took out large loans to buy investment properties.

"I would think that to the extent that pressure starts to be felt first, I think it will be felt in the investment area rather than the owner-occupier area," he told a Sydney hearing of the House of Representatives Economics Committee.

Mr Macfarlane said despite frightening media stories of young couples taking out excessively high mortgages, the average was still about $160,000.

And the average loan the existing home buyer is servicing is around $74,000.

Future rises in interest rates would be small, probably between 0.25 and 0.50 per cent, Mr Macfarlane said.

"People expect you to be observant and analyse new information and move slowly," he said.

Source: Herald Sun, June 1 2002
Author: Michael Madigan