Sydney’s hot housing speculators spark Reserve Bank alarm

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(Sept 17): A 16 percent jump in Sydney home prices in the past year is sparking alarm at Australia’s central bank.

Buyers shouldn’t be overly bullish in property purchases, Reserve Bank of Australia Assistant Governor Christopher Kent said at a Bloomberg Summit in Sydney yesterday. An investor-led surge in prices may amplify any subsequent fall and risk a drop in consumer spending, hurting the economy, the bank said yesterday in minutes from its Sept. 2 board meeting.

“We’ve been at great pains to always tell people when you’re making investment decisions, make them with great care, don’t assume prices can always and will always go up,” Kent said. “And don’t always assume interest rates will stay low for the length of the loan.”

The housing market has been pumped up by the RBA keeping its benchmark interest rate at a record-low 2.5 percent for more than a year, with investors accounting for a record 49 percent of new home loans in July. Demand for high-risk mortgages, including interest-only loans, is setting the stage for a jump in mortgage delinquencies when interest rates rise, Moody’s Investors Service said this month.

“This is the first time we have seen the bank show genuine alarm at the recent lift in house prices,” Westpac Banking Corp. Chief Economist Bill Evans said in a research note.

Foreign Buyers

Federal lawmaker Kelly O’Dwyer, who chairs a parliamentary inquiry into foreign investment in housing, told the summit she was concerned that first-time homebuyers are finding it “increasingly very difficult” to get into the market.

She also called for stronger policing of rules that restrict foreigners purchasing houses amid concern that Chinese buyers are helping push up prices in Sydney and Melbourne.

The Foreign Investment Review Board, or FIRB, which oversees the rules, “has demonstrated that they have not been doing their job,” she said.

“In order to give confidence to people you have to have a regime that will be properly enforced,” O’Dwyer said. “FIRB said that we think everybody is complying a little bit better. I think that defies credibility.”

Australian dwelling prices rose 11 percent in August from a year earlier, led by gains of 16 percent in Sydney and 12 percent in Melbourne, according to the RP Data CoreLogic Home Value Index. The nation has the world’s third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund.

First-Time Buyers

“There’s good reason to be concerned about affordability, it’s pretty tough to get into the Sydney housing market, particularly if you’re a first home buyer,” David Rees, head of Australasian research at Jones Lang LaSalle Inc., told the summit.

The share of home loans to first-time buyers fell in July to a record-low 12.2 percent, Bureau of Statistics data showed.

Treasurer Joe Hockey said he is less worried by the rise in home prices, dismissing concern that Sydney’s housing market is in a bubble.

“It is just an easy mantra for international commentators and for analysts based overseas to say, ‘well, there’s a bit of a housing bubble emerging in Australia’,” Hockey told yesterday’s summit. “That is a rather lazy analysis because fundamentally we don’t have enough supply to meet demand.”

Price Forecasts

Home prices are expected to rise between 8 percent and 12 percent in 2015 in Sydney, driving growth of as much as 9 percent across Australia’s major cities, SQM Research Pty said today. Melbourne will see gains of between 5 percent and 9 percent, Sydney-based SQM predicted.

David Cannington, senior property analyst at Australia and New Zealand Banking Group Ltd., offered more muted forecasts at the Bloomberg Summit. Sydney home price growth will remain below 10 percent, while Melbourne’s will stay close to growth in disposable incomes, he said.

“We’ve had some extremely easy monetary policy conditions with the cash rate staying at historical lows in the last 12 months,” he said. “As interest rates start to increase, that will start to contain some of the price growth going forward.”