Australia House-Price Jump Rekindles Bubble Fears

Australia House-Price Jump Rekindles Bubble Fears

JAMES GLYNN

Jan. 2, 2014 12:47 a.m. ET

SYDNEY—Home prices in Australia’s main cities surged in 2014, deepening concern a possible housing bubble may be forming that could potentially derail a fragile economic recovery.The country’s property market ran hot again last year with prices nationally rising at the fastest pace in more than three years, fueled by record-low interest rates and growing demand for investment housing.

The sharp rises throughout past year have created some of the most expensive property in the world, fanning concern the market may be overheating and that a sudden crash could make jittery consumers even more nervous about spending.

The central bank has cut rates eight times in the past two years to try to get other sectors such as retail and housing to pick up and to compensate for a fading mining boom that is expected to dent the economy in coming years.

The RP Data-Rismark house-price report for December showed home values rose by 9.8% during the 2013 calendar year. Sydney, the country’s largest property market, posted a 14.5% gain over the same period, while property prices in Melbourne and Perth also made strong advances. In December, home values nationally rose by 1.4% from November.

The housing figures came on the same day data showed manufacturing activity contracted in the last month of 2013. It was the second contraction in a row that erased expansions in September and October.

“This latest snapshot is yet another reminder of the urgency for Australia to put itself on a more balanced and diversified growth path,” said Innes Willox, chief executive of AIG Group, which did the survey.

The disparity between surging house prices and weaker manufacturing highlights the key challenge facing Australia’s economic-policy makers, who must find new sources of growth as the decadelong mining boom cools.

The central bank lowered its benchmark interest rate to 2.5% in August to help cushion the economy from a mining slowdown that is expected to push unemployment higher.

The resource-rich economy has already weakened after growing for 22 years straight. It expanded by 0.6% in the third quarter from the second, and by 2.3% from a year earlier, much slower than quarterly growth rates of as high as 4% in 2012.

Areas such as manufacturing, retail and tourism have been slow to respond to the lure of cheap credit, while investment in the mining sector slowed sharply last year. Consumer spending is showing only tentative signs of recovering.

With rates so low, the central bank has resorted to trying to jawbone down the Australian dollar, which has traded near historic highs for much of the past three years but has fallen below parity with the U.S. dollar in recent months. A high Aussie dollar makes life harder for exporters, particularly manufacturers, who lose out when repatriating overseas earnings.

Michael Workman, a senior economist at the Commonwealth Bank of Australia,CBA.AU +0.05% said he expected house prices to continue to rise this year, making further rate cuts less likely.

“From a financial stability perspective, house price appreciation is something that the RBA will continue to watch closely in 2014,” Mr. Workman said.

Paul Braddick, head of property research at Australia and New Zealand Banking Group,ANZ.AU -0.03% based in Melbourne, said it was too soon to be talking about a house-price bubble, saying fundamental economic factors were driving prices.

“Gains are largely explained by improved affordability, the release of pent-up sales and some catch up following earlier price falls,” Mr. Braddick said.