SYDNEY (Bloomberg) - Sydney home prices soared in June, spurred by an interest-rate cut a month earlier, raising concerns the central bank's efforts to revive the national economy could create financial stability risks.
Prices jumped 16.2 per cent from a year earlier in Australia's biggest city and advanced 10.2 per cent in Melbourne, CoreLogic Inc. said Wednesday. In contrast, the nation's other major cities recorded annual growth of less than 5 per cent.
Following the rate cut "there was an instant buyer reaction across the Sydney and Melbourne housing markets where auction clearance rates surged back to levels not seen since 2009," said Tim Lawless, head of research at CoreLogic. "Sydney homes are selling in just 26 days and Melbourne homes are selling in 32 days" even as rental yields decline.
Sydney recorded the biggest price gains since the Reserve Bank of Australia said in September it had begun discussing with the country's banking regulator possible measures to cool lending to investors in residential real estate. The divide between the two biggest cities and the rest of the country is reflected in a similar price for a two bedroom apartment in Sydney's city fringes or a four-bedroom house with a swimming pool in Brisbane.
"It just shows the extent to which Sydney house prices have detached from reality," Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. said. "Sydney home prices seem to have taken a life of their own. Clearly at some point they need to pull back."
The RBA said last year that investors were distorting the housing market and the Australian Prudential Regulation Authority in December urged lenders to limit investor home loan growth to 10 per cent a year. APRA said in May it expected a slowdown in such lending in the second half of 2015.
Landlords accounted for half of all new home loans in New South Wales state, of which Sydney is the capital, compared with 35 percent in the rest of the country, Treasury officials told a parliamentary inquiry on home ownership June 26.
After cutting the benchmark cash rate in May to a record low 2 per cent, RBA Governor Glenn Stevens last month described Sydney's market as "crazy'' while Treasury Secretary John Fraser called it a bubble.
Home values in the nation's biggest city have advanced 43 per cent since a low in 2012 while the average price across the nation are up 27 per cent over the same period. Reflecting the country's economic transition away from mining, prices in resources-hub Perth fell in June.
As prices rise, rental yields for investors are falling and stood at 3.3 per cent for houses and 4.3 per cent for units, CoreLogic said. Still, these are higher than special-term deposit rates of 2.65 per cent and the 1.2 per cent gain for the benchmark S&P/ASX 200 index over the past year.
"Sydney prices are on average 30 per cent above trend based on income growth," said Martin North, principal at Digital Finance Analytics. "We can't expect that defying gravity feature to continue for ever."