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Reserve Bank of Australia warns that further monetary tightening is likely in the months ahead

Just as the pundits were predicting a soft landing for the Australian property market, the Reserve Bank of Australia has warned that interest rates are likely to rise soon.

The Reserve Bank, which held official rates steady last year after two rises late in 2003, warned this week that it was inflation - and not the property market - which was likely to prompt another rise beyond the current level of 5.25 per cent.

Citing the fact that inflation was likely to reach  3 per cent next year - the top of the government's target range - the bank noted 'the likelihood of further monetary tightening required in the months ahead'.

Any rise in rates would come at a crucial time for the property market, which, anecdotally at least, has stabilised after prices fell more than 10 per cent on average around the country  last year.

With the so-called 'auction season' about the kick off in the state capital cities  later this month, agents have begun talking up the market again as sentiment spreads that prices have started falling, and that more quality properties will start to come back on to the market.

According to the Commonwealth Bank's property value guide, national median house and unit prices were unchanged in the  fourth quarter last year, with Queensland, Western Australia and the Northern Territory continuing to hold up as the strongest markets and to post increases on the previous quarter.

Queensland recorded the biggest move in the December quarter, with median house prices increasing 3.8 per cent.

In the unit market, Western Australia topped the major states, posting a 10 per cent rise in prices.

'At a national level, median house and unit prices have been unchanged for each of the last three quarters of 2004,' Commonwealth Bank executive general manager of mortgages and investments Geoff Austin said.

'This confirms to us that the property market is experiencing a soft landing after its previous strong gains.'

In Sydney, where speculation is growing that the New South Wales state government will abandon its  unpopular 2.25 per cent vendor tax on investment units in the run-up to an election in the next 12 months, prices continued to be flat, but at a median price of A$550,000 ($3.4 million) for a house, prices are still the country's most expensive.

The median price of a Sydney unit is A$360,000.

Clearance rates from auctions are also improving, with Sydney's clearance rate up to 56 per cent on the first weekend  of this month. The rate fell to a decades low in the early 40 per cent range last year.

The evidence, however, is still inconclusive, which means that any rise in interest rates - even  minor - could have a major impact on what remains a delicate market.

Research group Australian Property Monitors (APM) has released figures showing that for those vendors who decide  to sell  by private treaty instead of auction, it takes more than a month  longer to sell houses than a year ago.

According to APM's December figures, it took an average of 90 days to sell a property in Sydney via private treaty, an increase of eight days on the month of November and 55 days up on December 2003.

In Melbourne, it took 75 days to sell a property via private treaty, up five days on November and 32 days from December a year ago.

APM's home price guide research director Louis Christopher said the results indicated the market was in an inconclusive phase.

'The fact that it is taking, in some cities, three months to sell is one clear indicator of the ongoing weakness in the marketplace.'



Inflation may jolt interest rates