Australia could offer valuable lessons to UK market

A new report on the Australian housing market by the Royal Institute of Chartered Surveyors (RICS) and published earlier this month could have valuable lessons for the UK market, according to an article on the RICS website.

Both the UK and Australian housing markets, the article says, are characterised by high house prices relative to earnings, slowing house price growth after a period of rapid expansion, rising mortgage interest rates and a strong domestic economy.

Australian house prices have seen almost continuous rises since the mid-seventies, with an average house price growth of 2,9% since 1975. Since 1998 average house prices have risen from AUS $176,622 (about R907 000) to AUS $302,121 (about R1,55 million) (prices adjusted for inflation), a 171% increase. The latest boom in house prices was different in that it was widespread across every state capital, and was largely driven by a strong economy.

Australia is not alone in its period of rapid house price inflation. Some believe the world is experiencing its first ‘co-ordinated house price boom’, with prices rising across most developed countries. Australia’s market has been in-between two other English speaking developed countries, the UK and US, with prices rising faster than in America but slower than Britain. In recent years, the percentage increases have been particularly rapid in all three countries.

Recent data, according to the article, shows annual nominal house price increases are slowing sharply after a long period of rapid growth as interest rates take effect, raising the question of whether a crash is on the horizon.

Commentators in both the Australian and UK housing market, have voiced concern over the influence of buy-to-let investors. Australia’s experience suggests that the UK should not be overly concerned over the ramifications of a downturn in investor sentiment.

After examining a range of factors including real economic activity, total mortgage lending and house price inflation estimates, RICS expects Australian house prices to decrease by approximately one percent in 2005.

According to David Stubbs, economist at RICS: ‘The Australian housing market shows that while interest rate rises and high valuations relative to earnings will slow house price inflation, the owner occupier segment will support the market and prevent a crash, as long as employment and earnings remain strong. Furthermore, the behaviour of Australian investors suggests that UK investors will not rush to sell as house price inflation declines.’

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