Has the Australian house price crash started?

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Rising interest rates across the world are starting to have a more painful impact on global housing markets.

In the US yesterday, the country's largest luxury house builder, Toll Brothers, reported that its third quarter profits fall 19% - the first decline in four years. The group also slashed forecasts for fourth-quarter earnings - unsurprising, as the number of unsold new family homes in the US is currently at an all-time high.

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On Bloomberg, the headline was "Toll Brothers profit slumps as US housing boom ends."

And in Australia, recent news from the property market has been even worse - theres now talk of a crash.

"Housing crash puts sellers in debt crisis," declares an article from Monday's Sydney Morning Herald, kindly sent in by a reader.

The story opens with the news that a three bedroom house in Sydney sold for $260,000 at the weekend, 42% less than it was bought for in 2003, "a further sign of the depressed state of the Sydney property market."

The sale came "after the owners could not meet the interest payments on the $405,000 they borrowed to buy the house at the peak of the market."

The article goes on to say that "many vendors are confronting negative equity, where they owe more on the property than it is worth." The piece makes a worrying read for those on this side of the world who might have thought they'd never hear the dread words negative equity' ever again.

Many people look to the Australian housing market as an indicator of what will happen to our own. Australia also experienced what was dubbed by property pundits as a 'soft landing' a couple of years ago. And just as in the UK, there was a point when Australian interest rates were thought to have peaked - but now they keep on rising as inflation has moved well beyond the Reserve Bank of Australia's comfort zone.

Of course, over here much of the population still believes house prices only ever go up. And in sharp contrast to Toll Brothers, the UK's biggest house builder by value was upbeat in its assessment of conditions. FTSE 100 group Persimmon said that "The Bank of England's recent decision to implement a quarter-point rise in interest rate, effectively reversing last August's cut, has had no tangible effect on our business or visitor levels or enquiries."

Gosh. A full three weeks since the rate rise and the housing market hasn't collapsed yet. I guess everything's going to be OK then.

But it's no surprise that the housing market has sustained itself so far. A BBC radio programme, "Inside Money", earlier this month provided a real insight into how the mortgage industry is pushing property onto unthinking new buyers.

The 26-year old woman on the programme was trying to get on the property ladder in Glasgow. The trouble is, she was only earning £17,000 a year, and the two-bed flat she wanted was closer to £85,000. On top of this, she'd racked up £2,000 in debt on a credit card, and more on a personal loan, so that her debts were costing her £230 a month.

The Beeb took her for a spin around her various options for getting on the property ladder. The real eye-opener was the mortgage advisor the programme wheeled on. Heres a choice snippet of what professionals are telling indebted twenty-somethings who know nothing more about the property market than what they've gleaned from Location, Location, Location.

"At your age a 30-year mortgage would be perfectly reasonable if we work on an interest rate of 5% - which is actually more than you'd probably have to pay - so I'm building in a bit of a margin here in case by the time you find a property, rates have gone up a bit."

There are so many things wrong with this it's hard to know where to start. Since when was a 30-year mortgage perfectly reasonable'? Why not save up for another five years, and take out a 25-year mortgage instead? In that time you could pay off your debts, and even get a deposit together. And 5% is hardly a margin of safety when rates are already at 4.75%.

In any case, the woman balked at the monthly repayments. So here's the adviser's solution - take out an interest-only mortgage. "The way to look at this is to regard this as a stepping stone. It helps you to buy that first property. What you should do is start to make some extra payments as soon as you can afford to."

So there you go. Forget about repaying the capital on your home - just do it as and when you can manage. The girl's response was rapturous. "Before I did this programme I was like, no way interest-only mortgages. But after speaking to [the advisor], I kind of changed my views quite drastically on that, and I found out if I was disciplined enough, I could pay some extra money per month on to my mortgage which I didn't even know was a possibility with interest-only mortgages - and that's really appealing to me."

Back in the Eighties, people were sold endowment policies with overblown promises about their potential performance. Banks are still having to shell out for mis-selling them. But at least endowment policies provided some form of repayment towards the capital on the house. Now mortgage advisors are telling people to just have faith that one day they'll earn enough to actually make a dent in the massive debts they're taking on.

How are these people going to react in five years' time, when their house is worth less than they bought it for? What will they do when they realise that they've never quite managed to be disciplined enough to actually swap to a capital repayment mortgage, and now they have absolutely no chance of doing so because the payments will be far too high?

We'd advise these companies to start making provisions for their losses right now. Because one day this is all going to blow up in their faces.

Turning to the stock markets

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Although it recovered from earlier lows, the FTSE 100 still closed in the red yesterday, down 12 points to 5,902. Fears over Iran's nuclear capabilities, weak utilities and a poor performance from oil stocks, including BP and Royal Dutch Shell, kept the index in negative territory. The biggest faller was BAE Systems, which surrendered some of last week's gains to profit-taking. BA made the greatest gains of the day as it pulled back some of its recent losses. For a full market report, see: London market close

A strong start on Wall Street saw European shares close at a three-month high, despite London's weakness. The Paris Cac-40 closed 23 points higher at 5,128, whilst the Frankfurt Dax-30 also closed 23 points higher, at 5,818.

In the US, stocks closed flat after a day of uneven trading. The Dow Jones closed 5 points lower, at 11,339. The Nasdaq and S&P 500 were both slightly higher, up 2 points to 2,150 and up 1 point to 1,298 respectively.

In Asia, the Nikkei closed 18 points lower at 16,163 after it was revealed that consumer finance company Acom was under investigation by the FSA over its lending practices. Shares in Acom fell by almost 4% following the news.

Oil prices slipped slightly lower this morning, with crude trading at $72.75 in New York and Brent spot at $72.06 in London.

Spot gold was trading at $622.25 today, having hit a high of $628.50 in New York yesterday.

And the world's largest miner, BHP Billiton, announced a 77% leap in second-half profits this morning. The gains have been attributed to strong metals prices. The miner also announced a $3bn share buyback. However, shares fell by as much as 30p in London this morning, as results were only in line with expectations.

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