The first monthly fall in house prices in 17 months has signalled that aggressive RBA rate increases have successfully cooled the market.
House prices in Australia’s capital cities had emerged as a source of instability in the economy.
Economists said falls in capital city house prices would ensure the Reserve Bank of Australia kept interest rates on hold over coming months, with some saying the pause could extend into 2011 as inflation pressures were now also muted.
Where talk earlier in the year was of house price bubbles amid calls for the RBA to “lean against” double digit house price growth, more moderate rhetoric can be expected through the second half of 2010, as prices moderate, not collapse.
Analyst said strong fundamentals of solid population growth, average mortgage interest rates, a willingness of banks to lend for homes and low unemployment would help to bring about a soft landing for house prices over coming months.
The RP Data-Rismark Hedonic Home Value Index, issued today, fell a seasonally-adjusted 0.7 per cent in June versus May, but rose 0.1 per cent in the second quarter from the first quarter.
From a year earlier, capital city house prices were 10.5 per cent higher, according to the report.
Australia’s economy avoided the price declines associated with the subprime mortgage crisis that undermined confidence in northern hemisphere banks in late 2009. Far from seeing precipitous falls, house prices in Australia have risen, with a notable acceleration seen in 2009 and early in 2010.
Also today, housing credit growth slowed to 0.4 per cent in June from 0.6 per cent in May and rates twice as high earlier in the year, according to the RBA. If sustained, annual housing credit is on track to drop sharply in coming months.
“The RBA will be delighted with the engineered slowdown in house prices,” said Chris Joye, managing director at Rismark.
However, he said the RBA would not want sustained falls in house prices or a drop in housing credit, adding the central bank had the policy ammunition in place should price falls accelerate.
The RBA raised interest rates six times between October 2009 and May, taking the cash rate target to 4.50 per cent from 3.0 per cent, effectively rearming the policy gun.
Craig James, chief economist at Commonwealth Securities, said the pace of the slowdown in house prices represented a wake up call for policymakers.
“The pace of rate hikes — the most aggressive tightening cycle in 16 years — clearly has taken its toll,” he said.
It would be important now for the RBA to stay on the interest rate sidelines to give “shell-shocked” consumers and home-buyers a chance to catch their breath, he added.
David Cannington, economist at ANZ Bank, said he expected the annual pace of house price growth to slow to a single digit pace, with a strong domestic economy, bolstered by strong Chinese demand for commodities, to keep a floor under prices.
“The times of last year’s strong double digit growth in home prices experienced across most capital cities are now behind us,” Mr Cannington said.
“While we expect higher official interest rates into late 2010 and 2011, continued strength in employment and income growth should ease the pressure on housing affordability,” he added.
(Source: TheAustralian.com.au)
