RBA predicts a 20% housing value drop
The Reserve Bank of Australia, known as the RBA, serves as Australia’s central bank. The bank is responsible for determining the country’s monetary policy as well as issuing, managing, and controlling the Australian dollar.
The RBA provides banking and registration services to a number of government departments as well as several foreign central banks. The bank first opened its doors in 1960 and has been wholly controlled by the Australian government ever since.
The position of Governor is presently held by Philip Lowe. He took over for Glenn Stevens in the year 2016.
RBA Warning to Homeowners
The Reserve Bank of Australia has issued a stern warning to homeowners today, stating that they anticipate a drop in house prices of 20% over the next two years.
According to a story in the Australian Financial Review, the RBA thinks that the property market will suffer its largest blow since the 1980s, and it has shown this belief in papers that it has published under the Freedom of Information Act.
The gloomy projection is a direct result of the significant increase in interest rates that has been implemented in an effort to combat inflation; the cash rate is anticipated to be more than 3% by the time Christmas rolls around.
According to the internal documents of the RBA, the bank anticipates that prices would drop by 11% nationwide by the middle of the next year before reaching a level that is stable.
It is anticipated that prices will continue to decrease at a rate of 1.5% per month for the remainder of 2022 in both Sydney and Melbourne.
However, depending on how people react to the falling prices as well as the much higher interest rates, the national decline might be even bigger, reaching 20% by the end of 2024. This outcome is contingent on how people would behave.
RBA Economist Statement
According to the RBA economist who was cited in the papers, it seemed anticipated that prices would continue to fall. The economist said that they are now projecting that the values of homes will fall over the course of the next several years.
This indicates the continued slowdown in momentum in the marketplace and the steepening of predictions for the future path of interest rates, both of which are ongoing trends.
Economy Into Low Gear
In the meanwhile, people in Australia are being told that the economy is shifting into low gear, and the Treasurer is expected to reveal that growth forecasts have been reduced.
The new data were issued by the Albanese administration in advance of tomorrow’s federal budget. These figures reveal that the growth prediction for GDP has been reduced by 1%, which will have a negative impact on the economy of almost $25 billion.
It is anticipated that Treasurer Jim Chalmers would lessen the effect on average Australians by delaying investment in some sectors, like infrastructure, and diverting it to other priorities, particularly spending on social security.
Australian Real Estate Prices
It would not take much effort to form an inaccurate opinion on the cost of housing. They can be framed as important only insofar as they are socially divisive, providing fodder for population debates or the generation wars, pitting baby boomers against millennials, who complain that they are priced out of the market.
Some commentators can frame them as important only insofar as they are socially divisive.
But the headlines don’t tell the whole story when it comes to home prices. They are a massively important movable component in our economy and are the first to be affected by any shifts in interest rates.
As a consequence of this, the Reserve Bank of Australia (RBA) is required to keep a close eye on property prices due to the manner in which it exerts influence on other dynamic aspects of the economy.
Explosion in New Mortgages
Recent years have seen an explosion in the number of new mortgages, which means that new borrowers are more susceptible than ever before to general increases in interest rates.
As of right now, the starting point for the typical owner-occupier house loan in Australia is more than half a million dollars. This is mostly due to the phenomenal real estate market in Sydney.
These new borrowers have the greatest debt still to pay off, and as a result, they will be the ones who suffer the most from an increase in interest rates.
In addition to this, new borrowers who have a small deposit have the greatest probability of ending up “underwater” when property values decline, which means that they owe the bank more money than the house is now worth.
Even if you put down the standard deposit of 20%, if the market value of your new house drops by more than 20%, you will be underwater on your mortgage. Additionally, there are buyers that begin with deposits that are even less.
According to the findings of a study conducted by the RBA, the majority of Australians would continue making payments on their mortgages even if they owe more than the value of their property.
In contrast to debtors in the United States who run into financial difficulties, we do not often default on our loans. This indicates that the banks are quite secure even if there is a decline in the price of homes.
Economic Disaster
With one notable caveat, however, if there is also a significant economic disaster that causes a large number of people to lose their jobs, this may modify the inclination of Australian borrowers to continue paying down the mortgage.
The simple fact of being unemployed and having negative equity in your home is sufficient to force a default. This is the second primary factor that contributes to the significance of property prices.
A decline in housing values has the potential to bring the whole economy down.
The domestic economy is comprised of consumption (paying for dentists and lawyers, paying for cleaning and deliveries, plus consumables like fuel, food, and other things) and investment (buying machines, putting up new warehouses, and laying new roads).
Investment accounts for 24% of the economy, while consumption accounts for 76%. House prices are a significant factor in both, but they have a more immediate and significant impact on consumer spending.
Impact of Consumption vs. Impact of Wealth
Impact of consumption
Consumption is caused by the trade in real estate. When you are getting ready to sell a piece of property, you may decide to hire a landscaper and a painter to brighten things up.
When you purchase a home, you will incur costs associated with hiring a real estate agent, a mortgage broker, a conveyancer, and a moving company. After that, you will often hire some tradespeople to come in and address a few minor issues with your new home.
And lastly, most of the time you will be given some brand new furnishings. When a significant number of homes change owners, the cash registers at Harvey Norman begin to ring more often.
People trade more properties when prices of real estate are going up because sellers are eager to put their homes on the market, locations only remain on the market for a limited length of time, and buyers want to make purchases before values go up any more. When housing prices go down, the situation is exactly the opposite. Therefore, increasing housing costs have a very direct impact on consumer spending.
However, despite the considerable influence on consumption, it is only felt by a very tiny fraction of the population every year since it is only those individuals who purchase or sell a home.
Wealth Effect
There is a further impact that is much more significant than the first one, and it is known as the wealth effect.
The influence of wealth When the value of a person’s house increases, they have a feeling of increased wealth, which leads to increased spending.
Because the impact is magnified in proportion to a person’s level of wealth, it follows that elderly families are more susceptible to the influence of money. Recent events have been favorable for them, but it seems that their luck is about to change.
Conclusion
The RBA is quite concerned about the impact that decreasing property values may have on an economy.
A significant decline in housing prices results in a significant loss of wealth, which reduces consumer spending. That, in turn, can lead to an increase in unemployment, which, of course, makes it even more difficult for people to repay the mortgage loans they took out.
