House prices to cool, says RBA

Ian Macfarlane, head of the Reserve Bank of Australia, has issued a warning to house buyers: people who have over-extended themselves may be in for a rude shock. Mr Macfarlane said the main reason behind the price increases of the last five years was low interest rates, but there is no prospect of prolonging the “wild excess” of the housing market as there is no lower interest rate environment to go to.

Mr Macfarlane has indicated that interest rates will rise a further 1 to 1.5 per cent as the bank tries to prevent the economy overheating. The economy no longer needs the boost provided by low interest rates, Mr Macfarlane said in his report to the House of Representatives economics committee on Friday.

According to official figures, up to the December 2001 quarter, price growth in all Australian capital cities was between 16 and 20 per cent. The interesting thing, said Mr Macfarlane, is how widespread it was across Australia. But he said that the good news for renters hoping to get into the housing market is that the growth trend is unlikely to last much longer and the same sort of price rises are not likely in the future. He doesn't expect an immediate slow-down, however, although he said that last month's 0.25 per cent rise in interest rates is already slowing some areas of the market, in particular inner-Sydney apartments.

The RBA says it’s determined not to allow a situation like the UK's housing disaster in the late 1980s, when many householders went bankrupt due to a slump in house prices combined with an increase in interest rates. The group with the highest risk in Australia, Mr Macfarlane said, are those people who took out large loans to buy investment properties.

More: See RateWatch