Howard wise to house of the rising sum

By GREG ANSLEY Australia correspondent

CANBERRA - Prime Minister John Howard, a man with among the sharpest political antennae in the business, is listening with care to the rumblings of the nation's suburbs.

This is the home of his battlers, the people he wanted to become the greatest shareholders in the world but who turned away as the bears stalked their investments and who turned instead to the traditional Aussie hidey-hole: the family home.

Now skyrocketing house prices are on one hand locking out the young who want to start families in the suburbs, and on the other threatening the futures of those who have paid so much for a home, and the broader economy they support.

In the past year alone, average house prices have leaped about 20 per cent, to A$460,000 ($524,300) in Sydney, A$347,000 in Melbourne and A$265,000 in Brisbane.

The dreaded b-word - bubble - is now being openly bandied about by analysts who fear the housing market is ballooning rapidly to the point of explosion.

If that happens, Howard would ride into an election year on a tsunami of anger because families and investors will be forced to pay huge mortgages on properties no longer worth the money that was paid for them.

Worse, there is every expectation that interest rates will rise in the coming year after extended lows - at present about 6.5 per cent for a standard variable mortgage - hammering families who are treading narrow financial lines. Westpac spelled it out: a 0.5 per cent increase in interest rates, well within expectations, would push total household interest repayments as a proportion of income well above the harrowing days of the 1980s, when former Labor Prime Minister Paul Keating was Treasurer.

Many families would be in dire financial straits as a result.

So would the wider economy, which has prospered from both the buoyant housing market and homebuyers' use of rising house value to underwrite heavy borrowing on other consumer goods.

Faced with such warnings, most recently from the Reserve Bank and the International Monetary Fund, Howard has taken two paths.

The first has been to set up a Productivity Commission inquiry into why house prices have soared and what can be done about it. The second is to try to polish over the fears with a gloss of optimism.

Since 1988, the days of sky-high interest rates, the size of the average mortgage as a proportion of household income has risen from less than 20 per cent to more than 25 per cent, even with today's low rates.

In 1989, a house cost six times the average annual earnings; it now costs well over eight times.

Based on median prices provided by the Australian Bureau of Statistics, a house in a fairly ordinary Sydney suburb would have set you back A$251,200 in 1998, A$320,000 in 2001 and A$460,000 in June this year.

Demand has also surged in Tasmania and previously languishing country towns.

Through the roof

* In the past five years, average prices have rocketed up to 85 per cent, soaring 20 per cent in the past year alone.

* Interest rates are expected to rise in the coming year, putting tens of thousands of families under severe financial stress.

* Analysts warn that higher rates could also spark a collapse in property values that would leave many owing more than their houses are worth.