Bubble warning as house prices jump again

HOUSE prices rose solidly in the fourth quarter of last year, with all the major states reporting an acceleration amid expectations of more rate cuts.

Auctioneer Phillip Kingston auctions a house at 1 George St in Caulfield North, Melbourne for Gary peer.

AUSTRALIAN house prices rose solidly in the fourth quarter of last year, with all the major states reporting an acceleration supported by expectations interest rates would soon be cut again.

The weighted average of house prices across Australia’s capital cities rose by 1.9 per cent in the fourth quarter from the preceding three months, the Australian Bureau of Statistics said today.

House prices rose by 6.8 per cent from the same quarter a year earlier, the slowest pace of year-on-year growth since the second quarter of 2013.

In Sydney, house prices rose by 3.4 per cent in the fourth quarter from the third. Perth, meanwhile, recorded a 0.3 per cent gain — the weakest among the state capitals. In Darwin, house prices fell by 0.6 per cent.

A slowdown in economic growth towards the end of last year prompted many economists to forecast a resumption of interest-rate cuts in 2015.

The Reserve Bank of Australia cut the benchmark cash rate to a record low 2.25 per cent from 2.50 per cent last week, coming off the sidelines for the first time since August 2013 in response soft inflation pressures and stalling growth.

Interest-rate swap markets are pricing in the probability of at least one more rate cut before midyear.

Falling interest rates create the danger of overheating house prices, Paul Bloxham, chief economist at HSBC, Australia, said. “The risk of a housing bubble is increasing,” he said.

Australia’s economy has been pummelled in recent months by falling commodity prices, especially those paid for iron ore and coal, the country’s major exports. A plunge in the world-oil price is also expected to cut deep into profits from vast liquefied natural gas projects built over recent years.

While economic growth has slowed and unemployment has risen to decade highs, one hotspot for the economy has been speculative investment in housing — something the country’s banking regulator and the RBA has signalled has been running too hot.

The Australian Prudential Regulation Authority announced in December that it would boost supervision of investment lending, including the amount of debt borrowers are exposing themselves too.