A lesson on housing booms from Australia

August 24, 2005|By JAY HANCOCK

THE HOUSING boom in Canberra, Australia, was great while it lasted. Prices soared and folks got rich, not least the real estate brokers. But lately Aussie real estate has cooled off.

"Definitely," Canberra real estate agent Peta Barrett says on the phone. "The property market has dropped off a little bit, possibly by about 5 percent in the last 12 months," she says, and "everything's fairly flat" in the larger economy.

We bring you this dispatch because Baltimore's economic future may be playing out in the land of Vegemite and platypi. Canberra may be the closest thing Australia has to Charm City, and in Canberra, "the boom in the last couple of years is the biggest ever," says real estate agent Quinten Hodgkinson. "Properties were doubling in two years."

But mildly rising mortgage rates have stopped the Canberran home-price advance in its tracks along with the rest of Australia's real estate surge, harming consumer spending and overall growth. A similar fate may await the U.S. property bonanza, the thinking goes, and by extension, the one in Baltimore.

Equating the towns goes only so far. But as the federal capital, Canberra has enjoyed the same kind of government spending spurt, including for anti-terrorism, that has benefited Baltimore and environs. It's a medium-sized burg (pop. 340,000) as Australia goes. And it's expensive but still more affordable than the larger Sydney, 180 miles away.

The median house price in Canberra went from about $195,000 Australian in 2000 to $366,000 in March, according to the Real Estate Institute of Australia. In U.S. dollars $366,000 Australian is about $275,000. The average price for a single-family home in metro Baltimore went from less than $200,000 in 2003 to more than $300,000 now, according to Metropolitan Regional Information Systems.

In both places, home prices were propelled by extremely low interest rates that made mortgages more affordable. But then central bankers joined the act, raising rates and reducing the amount of money available for home loans.

Australia's Reserve Bank began first, gradually increasing overnight interest rates from the lowest in three decades beginning in May 2002. That's more than two years before Alan Greenspan and the Federal Reserve began their tightening from historic lows, which is why analysts believe Australia might be giving a sneak preview of what's in store here.

The good news is that it's not a catastrophe.

"It's cooled off substantially," says Hodgkinson. "It's come down probably 10 to 15 percent in the last 18 months." But homes are still selling, he adds, and "it hasn't crashed."

At the same time, however, Australian consumer spending has lagged and overall growth has been cut in half. Even at elevated levels, flat or slightly falling home prices make consumers feel less rich and crimp spending, analysts say.

In Australia, "the actual rise in interest rates that has occurred recently has been very modest," says Nariman Behravesh, chief economist for Global Insight, an economic forecasting firm in Boston. "It doesn't take much of a rise in long-term interest rates to get house prices to level off or actually come down." And with that, he says, "home-price appreciation as an engine of consumer spending loses its steam."

Indeed, long-term mortgages in Australia are only about 7 percent, versus about 5.4 percent for a 30-year year U.S. mortgage.

Is our destiny to be found Down Under? Not necessarily. U.S. mortgage rates have stayed amazingly low, even with Greenspan's tightening, because dollar-denominated debt is still highly sought by foreigners. They could lubricate home sales for a while yet. And the American consumer, never needing an excuse to assume new debt and buy more stuff, may prove more intrepid than his Aussie competitors.

But the U.S. real estate boom can't last forever, and Australia may give a view of how it will end - with a fizzle, not a collapse. Even that could slow the economy. Behravesh figures a 10 percent decline in national U.S. home prices could slice as much as 2 percent off annual growth - a substantial amount when the yearly growth rate in the second quarter was 3.4 percent.

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