Surprise as house prices put on 1pc

SYDNEY - House prices in Australia rose a surprisingly strong 1 per cent in the first quarter as hefty gains in resource-rich states outweighed yet another fall in long-suffering Sydney.

The overall gains came before this month's increase in official interest rates to 5.75 per cent, which analysts suspect could keep a lid on overall prices.

"Looking ahead, we would expect the housing market to be dampened by the interest rate increases we have seen already," said Rob Henderson, chief economist (markets) at NAB.

"But it has already turned; we don't think the higher interest rate would put it in negative territory," he added.

The weighted average price of houses in Australia's eight capital cities rose 1 per cent in the first quarter, from the previous quarter.

That beat market forecasts of a flat outcome and came on top of a 2.2 per cent gain in the fourth quarter.

House prices were up 3.6 per cent in the year to March, still a far cry from the 19 per cent growth seen at the height of the property bubble in 2003.

Back then it was Sydney and Melbourne that boasted the big gains, and it is those that have suffered the most from the deflating bubble.

House prices in Sydney fell 1.2 per cent in the first quarter, making seven falls in nine quarters, leaving them 3.1 per cent lower for the year.

In contrast, Perth and Darwin were riding the crest of the global commodity boom in their resource-rich states. Prices in Perth were up 28.8 per cent in the year to March, and Darwin boasted gains of 17.4 per cent.

The Reserve Bank of Australia raised its cash rate a quarter of a percentage point to 5.75 per cent on May 3, the first increase in 14 months. It cited growth in housing credit among several reasons for the tightening.

"They [RBA] will be watching house prices and credit pretty closely because they don't want to see it bounce back - I think they will want to keep the lid on it. They do not want to see a big boom re-emerge quickly," said Tony Pearson, head of Australian economics at ANZ.

Another restraint on housing is that, by many measures, Australian property is as expensive as any on the planet.

Industry figures this week showed housing remained at historically unaffordable levels in the first quarter, largely due to a rise in first-home-buyer prices across regional Australia.

Prices increased by 6.2 per cent in regional Australia while holding largely steady in the capital cities

"Home buyers entering the market needed to commit 18 per cent of their take-home pay towards mortgage payments in the late 1990s. Currently, home buyers need to set aside 26.4 per cent of their disposable income," noted Simon Tennet, an economist at the Housing Industry Association.

A recent study of international housing affordability by the Wendell Cox public policy consultancy found Australian housing was less affordable than that in the United States, Britain, New Zealand, Ireland and Canada.

Using data from the third quarter of 2005, it compared median house prices to median incomes and found big cities in Australia rated as "severely unaffordable".

The median price in Sydney was 8.5 times the median income, handily topping New York's 7.9 and London's 6.9.

- REUTERS