AUSTRALIAN house prices look vulnerable over the next year as rising interest rates and record levels of mortgage stress take their toll, The Australian reported today.

House prices in the US are off by 15 per cent from their highs, while Britain, Europe and New Zealand are also experiencing price falls, giving reason for concern in Australia.

The surge in Australian prices compared to the US over the past decade is partly to blame.

"US house prices went up threefold over the last 20 years, but Australian house prices went up fivefold," AMP Capital chief economist Shane Oliver says.

"More fundamentally, the huge surge in Australian house prices has left them very expensive and overvalued."

In real terms, Australian house prices have jumped from below trend in the mid-1990s to 32 per cent above trend today.

"The surge in Australian house prices over the last decade has led to a near doubling in the ratio of average house prices to average household disposable incomes," Dr Oliver says.

Poor affordability, together with overvaluation and soaring household debt, has left the local property market vulnerable to anything that discourages buyers. Rising mortgage rates will only add to the sector's woes.

Despite evidence that the Australian market is deteriorating, Dr Oliver says two factors separate Australia from problems in the US: an undersupply of housing and surging commodity prices that should deliver a large boost to the national income.

"A shortage of housing, a huge boost to national income from commodity prices and higher lending standards suggest that a US-style collapse in Australian house prices is unlikely," Dr Oliver says

http://www.news.com.au/business/money/story/0,25479,23669709-14327,00.html

NEWS.com.au May 9th 2008