Australia Rate Policy Risks Home Bubble
August 7, 2013 Leave a comment
August 6, 2013, 6:33 AM
Australia Policy Risks Home Bubble
By James Glynn
Australia’s interest rate cut Tuesday is an attempt to boost a sagging economy. But it comes with a risk: boosting already high home prices. The country avoided the kind of housing crash that consumed the U.S. after 2008. But a period of easy money–Tuesday’s cut to a record 2.5% low was the eighth since November 2011–has some observers worried. Loose monetary policy has failed to lift consumer spending, as Australia exits a decade-long commodities boom.The main beneficiary has been home prices, which rose 2.4% in the second quarter from the first quarter or 5.1% from a year earlier, their fastest pace of acceleration since 2010. House prices have risen steadily since May last year, making Sydney one of the world’s most expensive cities.
Some analysts say the bubble risks destabilizing an economy already dealing with slowing economic growth and rising unemployment.
“When trends in Australian house prices are compared globally, the signs look worrying,” Tony Hughes, managing director of credit analytics at Moody’s Analytics, said in a report. “House prices have increased for longer and faster than in many of the markets where prices cratered during the Great Recession.”
Paul Bloxham, a former senior manager at the Reserve Bank of Australia and now chief economist at HSBC in Australia, said the central bank isn’t yet worried about house prices but this could change. “This could be a worry, but it is not a worry yet,” Mr. Bloxham said.
Tom Kennedy, an Australian-based economist at J.P. Morgan, said house prices for now remain under control but could become worrisome if low rates spur other areas of the economy.
Fueled by easy credit, Australian house prices doubled from the late 1990s to 2003. In 2010, the bank raised rates amid concerns about spiraling house prices.
Local banks, for the most part, play down the risks posed by another house price surge, pointing out that rising real wages have made homes more affordable and allowed mortgage holders to pay off debts at a faster pace.
Still, many observers remain cautious. With unemployment expected to rise above 6% this year, defaults could be on the horizon.
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