Australian House Prices Fall, More Rate Cuts Coming

Australian house prices fell last year as tightening credit conditions and a sharp downturn in the economy put paid to the double-digit growth enjoyed in 2007, dealing a further blow to household wealth and pointing towards more rate cuts.

CNBC.com

Government data out on Monday showed prices of established houses fell 3.3 percent in the fourth quarter compared to the same period in 2007, when they were running hot at 14.0 percent.

The drop in wealth, already undermined by sliding equity and pension values, only added to expectations of another big cut in interest rates when the Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday.

Investors are pricing in a cut of 100 basis points in the key cash rate to a record low of 3.25 percent, bringing its easing since September to a massive 4 percentage points.

"The news has been so dismal that they almost have to cut by 100 basis points, and an even bigger move can't be ruled out," said Michael Workman, a senior economist at Commonwealth Bank. "That won't be the end either," he added. "The market's already pricing in rates under 2 percent."

The Australian government is also expected to announce a second package of fiscal stimulus measures, perhaps as soon as this week, in an attempt to limit any rise in unemployment.

Prime Minister Kevin Rudd on Monday told a news conference the government would "move heaven and earth" to support the economy even as the global recession blew a hole in its tax take.

Warning of a return to budget deficits after years of plenty, Rudd said tax revenues over the next four years were expected to be lower by a staggering A$115 billion ($73 billion). That is equivalent to over a third of annual tax revenues, or 10 percent of gross domestic product.

"But this government will leave no stone unturned when it comes to taking all necessary measures to continue to support growth and jobs," he said.

The depth of the trouble was illustrated by a monthly survey of 200 manufacturers, which showed activity contracted for the eighth straight month in January.

The Australian Industry Group/PriceWaterhouseCoopers Performance of Manufacturing Index (PMI) edged up a seasonally adjusted 2.9 points to 36.6, but remained far below the 50 threshold separating growth from contraction.
     
Relatively Resilient

The steep cuts in interest rates seemed to be offering some support to house prices as the pace of decline slowed on a quarter-to-quarter basis.

Prices dipped a smaller-than-expected 0.8 percent in the fourth quarter, compared to the third quarter when they sank 2.4 percent.

In any case, the annual losses of 3.3 percent in Australia are relatively modest compared to declines of 15 to 20 percent suffered in the United States and Britain.

More From CNBC.com

• Wall Street Looks To Stimulus After Bad January
• South Korea Suffers Record Fall in Exports
• Wen Sees Signs of Chinese Economy Reviving
• Rio Tinto Is Talking with Chinalco, No Deal Yet
• More Asia Pacific News

This was partly thanks to still high levels of skilled migration and a rising population. There are also far fewer unsold homes in Australia, which had never gone though the huge building boom that left so much stock in the United States.

Monetary policy was having more of an impact as the main variable mortgage in Australia is benchmarked off the central bank's cash rate, unlike in the U.S. where the most popular fixed rate mortgages are tied to Treasury yields.

Rory Robertson, interest rate strategist at Macquarie, noted that the headline variable mortgage rate had fallen to around 6.85 percent, from 9.6 percent before the central bank began easing.

"Big RBA-driven mortgage rate reductions obviously have provided major support for local home prices through recent global gloom and doom," he said.

Should the central bank cut as expected on Tuesday, the mortgage rate could drop to 6.0 percent or less, near its lowest since 1970.

"House prices will come under further pressure as unemployment trends higher," Robertson added. "But mortgage rates will continue to be reduced to new generational lows, providing great support to most homebuyers."

Copyright 2009 Reuters. Click for restrictions.