Moody's Warns on Australia House Prices

By James Glynn 

SYDNEY--Australian house prices--which have risen sharply fueled by record-low interest rates--may face a downward correction if the recent pace of growth continues, Moody's Investors Service said.

In a review of the resource-rich economy, the credit-rating firm said that with house prices climbing at the fastest pace in almost four years in the first quarter, there was a growing risk the real-estate market may be overheating.

Australian residential property prices didn't experience anything like the hefty drops seen in the U.S. and Europe in the aftermath of the global financial crisis. Over the past year, they've risen by about 10% nationally--with Sydney growing fastest among the major cities at a rate of about 17%.

Historically low interest rates have helped drive the gains, partly by encouraging more investment buying. The number of first-time home buyers has dropped to record lows, highlighting the worsening problem of housing affordability.

Growing interest in Australian property from offshore investors, including those from China, has also played a role in pushing up house prices in recent years.

"The housing market appears to be increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction, " Moody's said in its report Thursday.

The tone of the rating agency's warning was more urgent than the Australian central bank's recent murmurings on the property market.

The Reserve Bank of Australia has said it is watching the pace of growth across the country, and that it is concerned the gains are being driven chiefly by speculators. It has also acknowledged the risk to the nation's fragile economic recovery from any sudden crash in house prices.

So far, though, the central bank has steered clear of referring to any kind of bubble in property prices.

Interest rates were cut to 2.5% almost a year ago, as the country began to wrestle with cooling investment in its mining industry following a decadelong boom. Rates have remained at that level ever since as the central bank tries to reinvigorate nonmining sectors of the economy to pick up the slack.

Policy makers face a dilemma: To start raising interest rates to slow the house-price gains at the risk of harming jobs growth in the broader economy, or to leave rates at current levels and deal with the consequences of a possible correction.

Moody's stark warning may revive the debate over whether authorities should clamp down on mortgage lending to discourage investment buying--similar to measures in place in neighboring New Zealand known as macroprudential tools.

The rating firm said it was discouraged that the sharp rise in house prices hadn't, as the central bank had been hoping, yet flowed into significantly more home-building.

"Reaccelerating housing credit suggests monetary factors are playing a prominent role in fueling the housing market trends," Moody's said. "Rising housing prices haven't so far resulted in a construction boom."

Still, Moody's said Australia's economy may be shielded from the impact of any housing crash by the fact that many people with mortgages were well advanced in their repayments, and that major banks were well capitalized.

The firm reaffirmed Australia's AAA credit rating on Thursday, saying the economy, which came through the financial crisis in better shape than most, still displays a high degree of resilience.

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