Amid the debate about house prices, sparked by the deputy governor of the Bank of England saying that interest rates should rise to control inflation, a senior academic at the Australian School of Business has looked at house price forecasts.

Dr Jonathan Reeves, a financial economist at the Australian School of Business, says “Australian house prices have started to decline. It is likely that this is the beginning of a substantial housing correction, because the stimulus effects are continuing to fade.”

He says that in contrast to other developed countries, Australian house prices rose in 2009 and 2010, due to the government stimulus package that included specific housing stimulus.

He also notes the impact that an increase in interest rates may have on Australian house prices. “The magnitude of a fall in Australian house prices will most likely be influenced by overseas events, and the most immediate threat may come from the European sovereign debt crisis and the impact this could have on raising mortgage interest rates in Australia.”

The deputy governor of the Bank of England Charlie Bean said at a conference in Australia  yesterday that there may be little option for policy makers other than to clamp down on house price growth, even though this would be politically difficult and economically costly.

Dr Jonathan Reeves has also highlighted the impact of events in other overseas countries on Australian house prices. “Business cycles transmitted by China are also a high concern, along with the performance of the US economy, and in addition, falling house prices in New Zealand, with a weak New Zealand economy, may have substantial impacts on Australian banks operating in New Zealand.”

He says most Australian forecasters of house prices rely on Australian house price index returns, rather than overseas house price index returns, and this can lead to a fundamental problem in forecasting.

“There is simply insufficient historical Australian data available for reliable models to be constructed. In house price modelling with US and European data over the last century, the simple model of long run average house prices being a multiple of four times the average gross household salary, has proved to be a reliable guide. The economic rationale behind long run house prices not staying above a multiple of four for long periods is that households simply cannot afford this through all phases of the business cycle. Currently in Australia the multiple is over six and therefore they are very likely to fall.”

There’s a war brewing in Sydney over one of life’s staples – food. Consumers might be the ultimate winners, but the supermarket chains involved are bound to get a few bumps and bruises along the way.

This month US discount retailer Costco opens the doors of its second store Australia. The big-box style of food retailing begins trading in Auburn, in the heart of Sydney’s Western suburbs.

In terms of geography, Costco has hit the sweet spot, says marketing professor Paul Patterson from the Australian School of Business. “In Sydney the obvious location was always going to be the Western suburbs, and I suspect there’s a demographic in Auburn that is really looking for value for money in their supermarket spend.”

Patterson says Costco, with its focus of selling goods off shipping pallets out of huge galvanised barns with minimum levels of customer service, certainly is a very different value proposition from what supermarkets currently offer in Australia. But “shoppers today are very price-sensitive”.

Sure Woolworths and Coles might be full-service, however, the arrival of Costco could entice consumers to switch to monthly shopping, buying in bulk to save money. “This will make the existing players up their game,” says Patterson.

Costco – already well established around the globe with 550 stores – differentiates itself on price. “When you sell from a pallet in a large barn-like environment (much like hardware store Bunnings), there’s a perception that the prices are lower, and I’m sure they are, because Costco has a very different business model with lower overhead costs,” says Patterson.

Costco cuts its overheads by reducing above-the-line advertising and providing bare-bones service. The US retailer also saves on not having to depreciate fancy stores. And they have lower fixed costs.

However, there’s also a touch of illusion on pricing, suspects Patterson. “The very nature of the way they’ve set up, I think would give the perception that the prices are lower than they may actually be,” he says.

Woolworths and Coles won’t not stand by though and let this giant upstart erode their dominance of what is dished up on Australian tables. But to stop Costco from gnawing at their market share, the duo may well need to fight the newcomer on shelf price.

Wars over bread and milk may not be the only price cuts consumers get to see. Costco may well prompt Australia’s existing supermarkets to take a “further look at their own prices”, says Patterson.

Rather than a battle to the bottom, though, the market leaders could also decide to expand their loyalty programs and joint badging of credit cards, and fast-track their plans for one-stop shopping with newsagents, pharmacies and liquor all under the one roof.

The new Auburn Costco will have about 14,000 square metres of shopping area and 800 car parks. Distribution infrastructure was already established for the chain’s beachhead, its Melbourne Docklands operation, which opened in August 2009 and has between 75,000 and 100,000 members.

A similar store is opening in Canberra, and the US retailing giant plans to develop up to a further four Australian stores in the next three years.
The arrival of Costco follows that of German supermarket chain Aldi, which entered Australia’s eastern states 10 years ago.

Costco operates on a membership model, charging consumers $60 a year. “I think human nature will dictate that shoppers will want to recoup that $60,” says Patterson. “Consumers are going to be more likely to go back there to do repeat business, because they’ve invested $60 upfront in a membership.”

The Foster’s slogan might say: “Australian for Beer”. But if the latest suitor in the series of rumoured potential owners has its way, Foster’s will no longer be Australian-owned.

In June, British-based brewing behemoth SABMiller launched a A$4.90 per-share A$9.5 billion takeover bid. The takeover attempt failed but speculation is rife the world’s second-biggest brewer will be back to sweeten its deal.

Foster’s has been brewing beer since 1887. With such a long history in a young nation, and a marketing campaign built on true-blue Aussie accents, sunny beaches, larrikin humour and bikini-clad girls, it might be natural to anticipate a backlash from Australians if Foster’s was to fall into foreign hands.

The funny thing is – and one of the reasons that a takeover could pass without too much fuss – not many Australians actually drink Foster’s lager. Only 100 million litres of the beer, with the distinctive blue and gold logo, is imbibed in Australia each year versus nearly 682 million litres in Britain.

Nevertheless, most Australians know that Foster’s is part of Carlton United Breweries, which brews the more popular VB, Carlton Draft and Pure Blonde labels.

“The Australian association works for Foster’s overseas because the Australian lifestyle appeals to consumers – it’s a point of difference within the market,” says Australian School of Business marketing lecturer Dean Wilkie.

“Locally, many brands try to create an emotional connection with consumers by using their Australian heritage. ‘I am a proud Australian, Brand X is a proud Australian, so I will buy their product.’”

However, such a positioning is ineffective for Foster’s because many beer brands have created stronger connections with consumers through being associated their state (for example, the XXXX brand and Queensland) or their city (Melbourne Bitter) or their lifestyle (VB and the blue-collar worker), observes Wilkie.

If Foster’s ownership goes overseas, it will join a swathe of Australian “iconic” brands that are no longer locally owned. However, Foster’s will still be able to maintain its Australian association, provided the new owners continue to invest in it, Wilkie says. “Think of Vegemite, Arnott’s, Holden and from the beer industry, Tooheys.” Their investors are now in faraway lands, but they “still maintain a very strong association of being Australian”.

“Most consumers have probably experienced an international takeover of one of their favourite brands,” says Wilkie. “Therefore consumers will be less reactive to Foster’s being taken over by SABMiller. You could also argue that Foster’s ‘Australian’ image is mainly associated with the Foster’s beer brand itself.” And that image in recent years has lived on outside of the nation, rather than in it.

In the end does it really matter if Foster’s remains Australian-owned? “It won’t matter to consumers as long as the new owners do not mess with their brands,” says Wilkie.