By James Glynn
SYDNEY--Australian house prices--which have risen sharply fueled
by record-low interest rates--may face a downward correction if the
recent pace of growth continues, Moody's Investors Service
said.
In a review of the resource-rich economy, the credit-rating firm
said that with house prices climbing at the fastest pace in almost
four years in the first quarter, there was a growing risk the
real-estate market may be overheating.
Australian residential property prices didn't experience
anything like the hefty drops seen in the U.S. and Europe in the
aftermath of the global financial crisis. Over the past year,
they've risen by about 10% nationally--with Sydney growing fastest
among the major cities at a rate of about 17%.
Historically low interest rates have helped drive the gains,
partly by encouraging more investment buying. The number of
first-time home buyers has dropped to record lows, highlighting the
worsening problem of housing affordability.
Growing interest in Australian property from offshore investors,
including those from China, has also played a role in pushing up
house prices in recent years.
"The housing market appears to be increasingly likely to get
caught up in a positive price-feedback loop and eventually could
face a correction, " Moody's said in its report Thursday.
The tone of the rating agency's warning was more urgent than the
Australian central bank's recent murmurings on the property
market.
The Reserve Bank of Australia has said it is watching the pace
of growth across the country, and that it is concerned the gains
are being driven chiefly by speculators. It has also acknowledged
the risk to the nation's fragile economic recovery from any sudden
crash in house prices.
So far, though, the central bank has steered clear of referring
to any kind of bubble in property prices.
Interest rates were cut to 2.5% almost a year ago, as the
country began to wrestle with cooling investment in its mining
industry following a decadelong boom. Rates have remained at that
level ever since as the central bank tries to reinvigorate
nonmining sectors of the economy to pick up the slack.
Policy makers face a dilemma: To start raising interest rates to
slow the house-price gains at the risk of harming jobs growth in
the broader economy, or to leave rates at current levels and deal
with the consequences of a possible correction.
Moody's stark warning may revive the debate over whether
authorities should clamp down on mortgage lending to discourage
investment buying--similar to measures in place in neighboring New
Zealand known as macroprudential tools.
The rating firm said it was discouraged that the sharp rise in
house prices hadn't, as the central bank had been hoping, yet
flowed into significantly more home-building.
"Reaccelerating housing credit suggests monetary factors are
playing a prominent role in fueling the housing market trends,"
Moody's said. "Rising housing prices haven't so far resulted in a
construction boom."
Still, Moody's said Australia's economy may be shielded from the
impact of any housing crash by the fact that many people with
mortgages were well advanced in their repayments, and that major
banks were well capitalized.
The firm reaffirmed Australia's AAA credit rating on Thursday,
saying the economy, which came through the financial crisis in
better shape than most, still displays a high degree of
resilience.
Write to James Glynn at james.glynn@wsj.com