From ninemsn today…DOWNTURN..

What is the housing market doing? (Provided by echoice)
A swag of figures show home prices have stopped rising in most of Australia.

According to new Australian Bureau of Statistics figures, capital city house prices edged up just 2.5 percent during the first quarter of 2004 — the smallest gain since the March 2001 quarter.

And in the most notable sign that the market boom is over, the Financial Review newspaper reports real estate agents rushing to sell their agencies. On the last weekend in June, 24 agencies were on the market in Sydney alone.

Most analysts are predicting moderate house price growth over the coming 12 months. But some buyers may see prices falling in their suburbs.

What’s happening in the housing market

A host of March quarter figures released in recent weeks confirm what many analysts have been saying all year: the property boom is over. After house price rises of up to 20 percent a year since 2000, the ABS March quarter figures show a return to more moderate rates of growth.

The slowdown is most pronounced in Melbourne and Sydney. Melbourne house prices declined 1.3 percent over the quarter while Sydney prices rose 3.5 percent. Brisbane again led national housing growth, with prices up 6.2 percent while Perth rose 1.2 percent.

John Edwards, chief executive of research firm Residex, said the real story in property markets around the country might be worse. Residex figures published in the Sydney Morning Herald newspaper show Sydney house prices dropped by 1.3 percent.

Another independent firm, Australian Property Monitors, estimates that prices in the three months to March fell by 7.5 percent in Sydney and almost 13 percent in Melbourne. State real estate institutes, who traditionally try to keep an optimistic view, have also reported price falls.

A recent study by the Commonwealth Bank found that Sydney city units shed 12 per cent of their value over the past year. Prices for suburban units have also dropped in recent months, although median values increased slightly over the year.

In a further sign of a slowdown in the housing market, new statistics on the building industry show that builders started building fewer homes in the March quarter, the first time in almost a year.

Some analysts, though, believe the market has already stabilised. The Financial Review newspaper quotes a July report from Commonwealth Securities as saying that the market was “gliding into the next property-price plateau”.

Reserve Bank says prices dropping

The Reserve Bank raised home loan interest rates late last year to cool the booming housing market. It seems to have succeeded, with Reserve Bank governor Ian Macfarlane saying recently that the end of the house price boom was a welcome turnaround.

“The average owner-occupier is not going to be affected very much,” Mr Macfarlane said. “It’s the investors who are probably going to be affected.

“A lot of people thought they were going to get rich. They will discover that not only are they not going to get rich, but they’ve got this asset which will cost them a lot of money to service and its price is going down,” he said.

“The adjustment now under way in housing finance reduces this source of risk to the economy,” the bank said in its May statement, “but it is still too early to predict how it will unfold.”

But the Reserve also points out that information about home prices in Australia is “hopeless”.

What’s behind the housing slowdown

For the past year, analysts have been warning that the national property bubble was about to burst.

In Melbourne, renewed interest from first home buyers failed to lift the city’s property market. Median house prices fell in March for the first time in three years and analysts have warned of a sharp correction in the oversupplied CBD apartment market.

Auction clearance rates hovered around 50 percent for most of autumn, another sign of how far and fast the market has fallen since the peak just over a year ago.

But the news was not all bad. Agents say the Victorian Government’s new $5000 first home buyer grant will give the lower end of the Melbourne market a welcome push along during the usually quiet winter period.

It was a similar story in Sydney, where low auction clearance rates — and an oversupply of CBD apartments — stopped the property market in its tracks.

While last year’s two small interest rate rises are no doubt affecting buyer confidence, falling affordability and high debt levels are the main culprits.

Australians borrowed a net $39 billion in the year to March, fuelling the housing bubble and rising consumer spending. This comes on top of signs of slower economic conditions revealed in the March national accounts.

While employment remains at near-record lows, sales and capital investment intentions are at their lowest level for 2.5 years. The runaway growth seen in the second half of 2003 has certainly lost steam, with softer conditions forecast for the second half of 2004.

Apartments still at risk

High-rise apartments remain the wildcard in Australia’s property market. A recent surge in apartment construction highlights the current uncertainty in the national property market.

The Bureau of Statistics reported that 14,592 new houses and units were approved in February, up three percent on January and six percent higher than a year before.

Much of the increase was due to a late surge in apartment approvals, particularly in Sydney. Approvals for houses, by contrast, declined three percent nationally and 12 percent in Victoria.
Yet the outlook for apartment owners and buyers continued to worsen over the first months of 2004. In Melbourne, a leading developer of apartments is facing a court battle with disgruntled investors trying to back out of off-the-plan contracts.

Prices for apartments have started falling in Melbourne and Sydney, the two key investor markets for high rise apartments.

What will happen next

In its latest three-year property outlook, independent analysts BIS Shrapnel warned that house prices in Melbourne, Sydney, Adelaide and Canberra would barely keep pace with inflation over the next two years.

The report warns that while low interest rates, migration and continued demand for newer and bigger homes would underpin the national property market, big price rises are likely to be a thing of the past.

Key exceptions will be Brisbane, Perth and Darwin where double-digit house price growth can be expected over the next two years.

Rising interest rates may spark a wider property market downturn in 2006-07.

“Indicators are not as bad as many commentators are suggesting and BIS Shrapnel does not believe the conditions are there for a sudden drop in prices. There is no reason for significant price declines in the short-term as we are still operating in a period of strong economic growth and low interest rates,” the report said.

BIS Shrapnel director Robert Mellor said prices would keep rising across most of Australia over the next two years, although much more slowly than over the past few years.

He forecast Sydney house prices would rise by less than two percent next year and remain stable over 2005/06 before starting to fall in 2006/07.

Melbourne house prices will be steady over the next two years while Adelaide and Canberra will see price growth of three to four percent.

Brisbane will be a standout performer, with forecast growth of 17 percent over the coming two years.