Sydney - Thursday - September 1: (RWE Aust Business News) - Signs of a mild slowdown in Australian house price growth in the June quarter will eventually have an economic impact, an economist said today.
Prices in Sydney in the quarter led the 0.1pc fall in the index after they dropped 3pc while other capital cities reported gains.
The price pattern across the capital cities suggests that the correction is most acute in the larger east coast cities, where the evidence of oversupply is most convincing, JP Morgan economist Jarrod Kerr said.
"The national figure is being held up by price gains in the smaller cities, which seem to be behind the Sydney-Melbourne cycle, and where the oversupply is not as acute," he said.
House prices in Perth and Darwin, where population and economic growth are stronger, continue to rise.
There is a strong cyclical component to Australia's real house prices,with the average cycle spanning 4-5 years, Mr Kerr said.
However, the boom periods outlast the busts, and the bust periods tend to linger for over one year, he added.
This cycle probably will be no different.
"Our estimates show that house prices in real terms dropped 2.5pc on a year average in Q2, which probably represents the continuation of a prolonged trough in house prices," he said.
Mr Kerr said that, over the past three years, the housing boom has taken on some characteristics of a bubble.
Investors have driven the market despite rising vacancy rates, record low rental yields, and new supply.
However, JPMorgan forecasts that nominal house prices will fall 10pc in the current cycle.
JPMorgan previously estimated housing in Australia to be 22pc overvalued based on first quarter numbers.
Sydney and Melbourne were the least attractive cities, being 37pc and 22pc overvalued respectively.
Mr Kerr said falling house prices will have a significant impact on Australia's economic outlook, because it will have a major impact on household balance sheets, which have been inflated by the earlier house price boom.
"Falling house prices will cause home equity withdrawal to dry up and therefore will be a significant headwind for consumers, a view that underpins JPMorgan's cautious view on the economy," he said.
JPMorgan has a sub-trend economic growth forecast of 2.3pc for calendar year 2005.
