Rates Down, But Buyers Still Feel Jittery

The Sunday Age

Sunday October 12, 2008

Chris Vedelago and Peter Weekes

THE property market yesterday endured one of its worst days this year as buyers - stunned by the global sharemarket meltdown and growing fears of a local recession - decided their best bet was to hang on to their cash.

Melbourne's auction clearance rate fell by five percentage points as buyer confidence dived on talk of a recession and growing unemployment.

Even though the Reserve Bank last week slashed interest rates by the largest amount since 1992, economists and property experts are divided over whether the move will stop the housing market from collapsing.

The Real Estate Institute of Victoria reported the clearance rate yesterday was 63%.

"We're quite happy with the result - which is in line with the average clearance rate for the year - especially when taking into consideration all that has been going on," said Enzo Raimondo, chief executive of the Real Estate Institute of Victoria.

While agents remained upbeat, economist Steve Keen from the University of Western Sydney yesterday told The Sunday Age that it was likely prices would fall by as much as 40% as households struggled to meet repayments.

"We have had the biggest housing bubble in our history and it has driven up our house prices to the most unaffordable in the world," he said.

Melbourne house prices have soared by 46% since 2001, largely fuelled by cheap credit. The dramatic growth means the median house now costs more than seven times the median annual household income. The historical average is three times.

"In 1990, servicing mortgages cost three cents of the household dollar - now its 15 cents, even with lower interest rates," Mr Keen said.

"This is because of the sheer size of the debt - that's the pressure that's going to be pushing house prices down and it's actually the same kind of pressure that is in the US."

Mr Keen said the lower end of the market was already collapsing, with the upper end now suffering from the huge losses on the stockmarket.

Martin North, head of Fujitsu Consulting, who developed the "mortgage stress-o-metre", said that despite the rate cuts, 1million households would be under mortgage stress by March.

"The thing that is counteracting the positive effects of the rate cuts is the rise of unemployment, which we expect will rise to 4.6% in March," he said.

But not all are so bearish. CommSec senior equities economist Craig James cites the property revival following the 1987 stockmarket crash.

"Back in '87, the sharemarket was shunned, interest rates were cut significantly so cash was shunned, and investors decided to go into the property market."

Mr James said the recent report from the International Monetary Fund stressed that the Australian housing market would not experience the same dramatic falls as the US and Britain because of the nation's strong population growth, fuelled by immigration.

"Migrants have to live somewhere and we are not building enough houses and apartments, so we haven't got enough for an oversupply situation."

© 2008 The Sunday Age

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