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Australia's housing costs still sky-high, but boom may be ending

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Home values have cooled off recently. So far this year they have dropped almost 2 per cent in Melbourne (above) and more than 2 per cent in Sydney.

Sydney

THE home was not perfect. The two-bedroom townhouse lacked parking and a backyard. Its proximity to a major road and a train station made for noisy evenings.

But like many young Australians, Georgia Blackie felt she needed to buy it or rent for the rest of her life.

She lives in Melbourne, one of the world's wildest and most expensive real estate markets. The values of dwellings there have risen by more than 50 per cent in the last six years alone.

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In Sydney, Australia's other big real estate capital, the increase has been even higher.

The two cities are among the world's least affordable for housing, according to one survey, worse than famously pricey places like New York and London. Mortgage debt puts Australian households among the world's biggest borrowers.

Lately it has cooled off, though, and people like Ms Blackie may pay the price. She and her partner closed on the townhouse last August for A$720,000 (S$726,700). But since the market's peak in November, neighbourhood home values have slipped about 6 per cent.

"If property prices do go backward, where does that leave you?" said the 31-year-old lawyer.

A real estate bacchanalia in recent years in Sydney and Melbourne turned some homeowners into millionaires and left many millennials believing they would never be able to afford homes, sometimes leading to rifts between the two groups. Now the market's party is taking a pause.

Nobody is predicting a US-style housing crisis just yet. In fact, many economists predict that housing prices will soon rebound.

But a sustained slump could crimp consumer spending and pressure homeowners who borrowed too much under generous mortgage terms at a time of stagnant wage growth.

Global interest rates are rising, too, which means many Australians could be facing higher interest payments, thanks to the popularity of adjustable-rate mortgages.

If many households are forced to sell, "to me that's the biggest match that could ignite things", said Richard Holden, a professor of economics at the University of New South Wales.

While price increases elsewhere in recent years have been more modest, Sydney and Melbourne account for the lion's share of Australian real estate.

They make up about 40 per cent of the population and a majority of the property market value. Home values in both cities dropped last year, in some places in Sydney by more than 10 per cent, according to Corelogic, a property data provider.

So far this year they have dropped more than 2 per cent in Sydney and almost 2 per cent in Melbourne.

The decline has a number of causes, including new restrictions on foreign buyers, which hindered wealthy émigrés and investors from China.

But a major factor is that Australians probably could not take much more. Prices, many experts say, simply rose too high too quickly.

"We are on the edge of a precipice," said Martin North, principal analyst for Digital Finance Analytics, an independent research and advisory firm. "All of the forces that have driven the home sector and the debt sector higher in the last 20 years are all coming to a critical inflection point."

So far, the economic damage has been minimal. Mortgage delinquency rates were largely stable last year, according to S&P Global, a ratings firm, though they are expected to rise this year.

Moody Analytics, a financial intelligence firm, forecasts that home prices will resume rising by year's end.

Still, signs of stress are showing. Mr North, the analyst from Digital Financial Analytics, estimates that of 3.5 million mortgages where the owner lives in the home, almost a third of the households have incomes close to or less than their expenditures.

He predicts that at least 50,000 homeowners may default in the next 12 months.

The long run-up in housing prices mirrors Australia's boomtime economy, which has not seen a recession in more than a quarter-century.

Demographics helped Sydney and Melbourne in particular, as the cities attracted both Australians and immigrants.

The run-up has put local homebuyers under pressure. After Switzerland, Australia has the highest ratio of household debt to economic output among a group of nations that includes the US, Europe, China and other Asian countries, according to the Bank for International Settlements, an organisation that links up central banks.

About one-quarter of Australian households have less than one month's extra put aside in savings to make the next mortgage payment, the country's central bank said in February.

Domain, an Australian real estate website, found in June that the average Sydney couple would take nearly nine years to save for a 20 per cent deposit on an entry-level home near the city's central districts.

"Almost everywhere you look, you can see icebergs," Mr North said.

Australian officials have taken notice. Last year, financial regulators announced new lending restrictions aimed at mortgages that allow borrowers to pay only interest and put off repaying the loan itself.

A government-backed banking commission this year has unearthed questions about mortgage vetting practices at some banks, prompting a few to review their policies.

That has helped tame prices. Some middle-class suburbs in Sydney have seen declines of more than 10 per cent and in Melbourne more than 6 per cent since the market's peak late last year, according to CoreLogic.

According to data from the REA Group, which operates Australia's largest real estate website, the average number of people looking per listing has dropped by nearly a quarter over the last year.

"I think it's just hit a price point that people were uncomfortable with," said Nerida Conisbee, the chief economist of the REA Group.

What happens next could depend on interest rates. While Australia's central bank has kept rates low, a few local banks have raised mortgage rates slightly.

"The air comes out of the bubble slowly," said Terry Rawnsley, an economist for SGS Economics and Planning, an urban planning firm.

Real estate agents are preparing for a tough road ahead. "It used to be a cash and dash," said Charles Baynie, a real estate coach, referring to the ease at which properties were snapped up. "Now it's not." NYTIMES

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