Australia Points The Way for UK House Market

In recent months we have highlighted developments in Australia, another economy whose very rapid rates of house price growth in recent years appear to have left its housing market significantly overvalued and vulnerable to a correction.

The most recent data show that developments in Australia continue to mirror those in the UK, with further evidence that house price inflation is falling. The latest house price data show that prices edged lower in the second quarter of 2005, albeit only by a marginal 0.1%q/q. Nevertheless the modest decline in prices was sufficient leave Australian house prices 0.1% lower than in the same period a year earlier. Australian house price inflation has only previously been negative in two quarters since 1987.

The city data also mirror the UK experience. House prices are weakest in Sydney, Australia's economic (if not official) capital. Prices in Sydney have now failed to rise for five consecutive quarters, and are 5% lower than a year earlier. (The evidence suggests that London and the South East have, to date, borne the brunt of the UK house price downturn.) But house price inflation was also negative in Melbourne and Hobart and is fast approaching zero in Brisbane and Canberra.

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After house prices rose by 0.6%during the fourth quarter of 2004 and 0.2%during 2005's first quarter, there had been hopes that Australia had engineered a soft landing for the housing market. And, on its own, a 0.1% decline in prices in the second quarter of 2005 will do little to dent those hopes.

But, having shown some signs of stabilisation earlier in the year, there are also fresh signs that forward-looking housing market indicators are on the wane. In June, mortgage and other lending secured on housing rose by just 0.6%, the smallest rise since December 1997. And approvals for new building and renovations slumped almost 9% in July on the previous month, the weakest results for three years. In August one of Australia's largest suppliers of building materials reported the temporary closure of some of its factories in response to the housing slowdown.

Whether or not house prices fall in Australia and by how far remains a matter of debate, as in the UK. But the latest house price figures in Australia, especially at the city level, cast fresh doubt on the view that somehow house price inflation has a magic floor at zero. Both in the UK and in Australia, the housing markets continue to look overvalued despite the sharp drop in the rate of house price inflation. As such, it seems likely to us that the falls recorded in some parts of each country will become more widespread over time. But the recent patterns in the house price data in both countries point to the conclusion that any adjustment will be slow and protracted, not a short sharp shock.

By Ed Stansfield, Property Economist at Capital Economic