*National house prices surged 4.2%q/q
*Strongest price gains in Melbourne and Perth
*Withdrawal of stimulus means house price gains will moderate

Australian house prices surged 4.2%q/q in 3Q (J.P. Morgan: 2.6%, consensus: 3%), equal to the 4.2% spike in 2Q, which was the first quarterly rise in five quarters and the largest gain since 3Q07.

The spike in house prices is largely attributed to strong demand from first home buyers, who have kept house prices at the low- to middle- end of the property price spectrum well supported since October last year, when the government expanded the first home buyers’ (FHBs’) grant. The fiscal boost has been combined with aggressive monetary policy easing, which clearly has dragged buyers back into the housing market. That said, house price gains across the nation have not been uniform, owing to differing rates of population growth and affordability. In the third quarter, house prices grew most rapidly in Melbourne, but rose only modestly in Adelaide and Hobart (see tables, graphs at the following link: http://img.scoop.co.nz/media/pdfs/0911/Australia_Housing_graphs.doc).

House price growth should ease in coming quarters as the government’s assistance to the sector abates, with the expanded FHBs’ grant being phased back to A$7000 throughout 2H09, from A$14,000 for those buying existing homes and A$21,000 for those buying newly constructed homes. Further dampening house prices will be the government’s decision (announced on the weekend) to introduce price caps on the grant as of December 31. NSW, Queensland, Victoria, WA and the NT will introduce the caps. In NSW, WA and the NT, only homes under A$750,000 will receive the A$7,000 grant. In Queensland the cap will be A$1 million and in Victoria A$600,000.

Adding further weight to the housing market will be higher interest rates. The RBA lifted the cash rate 25bp in early October and a steady string of 25bp moves are expected from here on in, including the one we forecast to be delivered tomorrow, which will take the cash rate to 2.5%. The predominant risk is that the major domestic banks out-hike the RBA, increasing their variable mortgage rates by more than the RBA rate hikes in an effort to compensate for the still-elevated level of bank funding costs.

ENDS