Uneven Market a Dilemma for the RBA

October 9th, 2013

Even though house prices increased Australia-wide by 1.6 percent in September, extra strong growth in Sydney and Melbourne is distorting the national picture and leading to unrealistic expectations in some quarters. ; According to Tim Lawless, national research director at RP Data, "Any debate about unsustainable growth in housing markets should be very much focused on Sydney and Melbourne... Most other capital city housing markets are in fact showing only a modest growth."

Clearance rates in the two cities were also well above average, with Sydney continuing to reach above 80 percent and Melbourne not far behind in the mid 70s. ; According to Australian Property Monitors, 81.8 percent of listed Sydney properties sold in the first weekend of October, with Melbourne recording 75 percent over the same period. ; The combination of rising prices and impressive clearance rates are at odds with the Reserve Bank's downward bias for interest rates, which were held at 2.5 percent in the latest update.

According to Andrew Wilson, senior economist at Australian Property Monitors, future interest rate decisions will be made more difficult due to the emergence of a two-speed market. ; "The economy may be requiring further stimulation... but the dilemma is that we've already got house prices growing solidly in Melbourne and Sydney." said Wilson. ; While possible future cuts may help other cities, they are also likely to increase growth in Sydney and Melbourne and may even exaggerate the distance between markets.

While the Reserve Bank definitely has lots to think about next month, according to some commentators, the current rate of growth in Sydney and Melbourne is unsustainable. ; RP Data's Cameron Kusher thinks other capital cities are more likely to experience prolonged growth as relative affordability improves. ; “Given that historically, growth periods have tended to be shorter in Sydney and Melbourne than those in Brisbane, Adelaide and Perth, it would be reasonable to anticipate that the current rate of value growth will not continue for an extended period of time,” said Mr Kusher. ; ;