Australia’s Housing Boom Spreads Beyond Sydney

Australia’s Housing Boom Spreads Beyond Sydney

Prices Fuel Debate Over Whether Central Bank Should Act

RACHEL PANNETT

Jan. 21, 2014 1:57 p.m. ET

Record-low interest rates and looser mortgage lending are boosting property speculation in Australia, with much of the recent strength in house prices driven by investors. The WSJ’s Rachel Pannett explains that while there is no bubble yet, there are worrying signs.LIVERPOOL, Australia—This once-downtrodden Sydney suburb is on the rise, an emblem of Australia’s booming housing market.

Dilapidated cottages and housing estates are giving way to large homes and modern multistory apartments. Vacant land for residential development here goes for as much as A$400,000 ($352,574) per acre, compared with about A$200,000 five years ago, according to Australand Property Group

, ALZ.AU -1.15% a developer in the area.

The housing boom in Australia, once thought to be limited primarily to central Sydney, is spreading to other parts of the country. Prices of land and houses are rising in numerous cities and suburbs, fueled largely by demand from both large and small investors looking for yield amid low interest rates engineered by the central bank to keep the economy growing.

Nationally, house prices rose almost 10% last year, the strongest gain since 2010, according to data released earlier this month by RP Data, a property research firm. Sydney saw the largest rise with a 14.5% increase, but prices were up 9.9% in Perth, 8.5% in Melbourne and 5.1% in Brisbane, the firm said.

“We have new land releases where people are sleeping overnight to secure the land to build their new home,” Liverpool’s mayor, Ned Mannoun, said in a recent interview from an office that overlooks pawn shops and dollar stores.

The price increases have fueled a debate over whether the Reserve Bank of Australia should raise interest rates to keep the market from overheating. Back in 2010, when house prices last rose sharply, the Reserve Bank tightened policy to cool things off.

But lately the bank has been keeping rates at a record-low 2.5% to aid an economy that is slowing as a decadelong mining boom fades. Australia sidestepped the global financial crisis largely because of the strength of its mining industry.

The central bank doesn’t want to raise rates, a blunt tool that could undercut a revival of retail spending and construction. Bank officials say a housing bubble isn’t emerging yet, arguing the rate of house-price increases is in line with income gains.

Still, the central bank is closely watching a sharp uptick in mortgage lending, particularly to people buying houses strictly as investments rather than as a place to live. A report from the Australian Bureau of Statistics last week showed the value of home loans approved in November rose to A$26.9 billion, a 15% increase from a year earlier.

Over 46% of the loans in November went to investors, compared with 43% a year earlier, according to AMP Capital, one of the country’s largest fund managers. First-home buyers accounted for only 12.3% of the loan volume, the lowest level in more than two decades.

Australia’s biggest banks have been competing for a bigger share of the mortgage business, waiving application fees and asking for down payments as low as 5% of purchase prices. Nearly a fifth of home buyers have put down as little as 10%, while more than half of all new loans are for interest-only mortgages, which are popular among investors.

Analysts say the growing role of investors is helping drive up prices. Some say this is a source of concern because investors are more likely than owner-occupiers to sell in a downturn.

“A growing proportion of the market owned by investors potentially introduces an element of instability in house prices that hasn’t been there before,” says Saul Eslake, chief Australia economist at Bank of America Merrill Lynch.

Large development companies—both foreign and domestic—are increasing investments in housing projects in fringe areas. But there also are many small investors in the market partly because Australia’s pension system gives citizens the ability to opt out of official plans and manage their own investments, including in residential property. In other countries including the U.S., people generally can’t do that with money in 401(k) plans and other employer-sponsored pension programs.

Rising prices are pushing many of these investors into the suburbs, where houses are cheaper, says Paul Love, a 43-year-old maintenance engineer who owns three investment properties in the Sydney area. He bought the latest, a four-bedroom house with a double garage in Sans Souci—about 12 miles from the city center—six months ago for more than A$1 million.

Mr. Love says investing in housing “is easier to understand” than the stock market. “I buy it, they pay rent, I pay the mortgage. The price goes up,” he says. “I don’t like the idea of having A$100,000 worth of shares one day and waking up the next day to find you only have A$1,000 worth of shares.”

But investors are making it difficult for people like Jason Silverii, a 40-year-old corporate affairs manager for a large Australian law firm. He and his wife started looking for a home five years ago in Kew, a well-heeled suburb not far from Melbourne’s city center, but they were continually outbid at auction, often by investors. “You’d go to auctions and scan the crowd and you could just tell: single guy in his 30s, dark suit,” he says.

Six months ago, they settled on a three-bedroom house with a small courtyard and double garage in Reservoir, a working-class suburb miles from the city center. They paid A$470,000 for the blonde-brickhome at auction, more than 30% above the quoted price.

“We don’t see it as the house we’ll grow old in,” Mr. Silverii says. “You have to trade lifestyle to get into the property market.”