RBA: House prices could fall 40% in 'extreme' scenario

author-avatar By
on August 25, 2020
RBA: House prices could fall 40% in 'extreme' scenario

Photo by Shaqyl Shamsudheen on Unsplash

Australia's central bank has warned house prices could plummet in the event of a severe downturn.

A Reserve Bank (RBA) research discussion paper 'How Risky Is Australian Household Debt?' studied how Australia's high Debt to Income (DTI) ratio affected a number of economical factors. 

Assessing how high household debt would affect households' consumption, the paper applied a scenario where house prices would almost halve, which it said was entirely possible given the past and current recession. 

"The scenario involves employment falling by 8% and housing prices falling by 40%," authors Jonathan Kearns, Mike Major and David Norman said.

"We believe this is an extreme but plausible scenario, which is broadly in line with the shock experienced by some countries during the global financial crisis."

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner-occupiers.

Lender
Advertised rate Comparison rate* Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval

VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
ZERO APPLICATION FEESFEE FREE OFFSET

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
  • No upfront or ongoing fees
ZERO APPLICATION FEESFEE FREE OFFSET

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
  • No upfront or ongoing fees
FixedMore details
USE A MARKET LEADING APP TO HELP YOU PAY OFF YOUR LOAN SOONER

Fixed Home Loan 1 year (Principal and Interest) (LVR < 80%)

  • Make up to $20,000 additional repayments per fixed term
  • Redraw available – lets you access any extra loan repayments you’ve made
  • Choose to rate lock for 90 days (fee applies)
USE A MARKET LEADING APP TO HELP YOU PAY OFF YOUR LOAN SOONER

Fixed Home Loan 1 year (Principal and Interest) (LVR < 80%)

  • Make up to $20,000 additional repayments per fixed term
  • Redraw available – lets you access any extra loan repayments you’ve made
  • Choose to rate lock for 90 days (fee applies)
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • No application or ongoing fees.
  • 100% free offset sub account.
  • Fast online application, approval in minutes not weeks.
  • Mobile app, Visa debit card, Apple and Google Pay
  • Refinance loans and variable rates only.
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • No application or ongoing fees.
  • 100% free offset sub account.
  • Fast online application, approval in minutes not weeks.
  • Mobile app, Visa debit card, Apple and Google Pay
  • Refinance loans and variable rates only.

Rates correct as of January 21, 2022. View disclaimer.

They said the unemployment fall was comparable to what the country was currently experiencing, while the house price fall was extreme, but had been evidenced in other countries in the past. 

"The housing price fall considered is more extreme than the 1990s (20% fall in real housing prices) and during the global financial crisis, but is comparable to falls experienced in countries that were heavily affected by the crisis, including the United States (32% fall), Spain (37% fall) and Ireland (55% fall)." 

This scenario would also see a substantial fall in consumption of 12%, from peak to trough, which it said demonstrated consumption was more sensitive to a fall in house prices than an increase in unemployment. 

"Roughly three-quarters of the consumption fall can be attributed to wealth effects, with the vast majority of this resulting from housing wealth," they said.

"For households over 40 years old, about 20% of the wealth effect is attributed to changes in superannuation assets. The rest of the fall in consumption is driven by income shocks.

"The fall in investment income, bonuses/overtime income and wage income are all of roughly equal magnitude."

houseriskdebt10

Source: RBA

The paper also found while Australia had a high DTI ratio compared to other developed nations, much of our household debt was held by those who wouldn't easily default on it. 

"The losses are also low because debt tends to be held by households who are well placed to service it, consistent with previous research (particularly Bilston et al (2015))," they said.

"Highly indebted households tend to have lower estimated probabilities of unemployment and higher incomes.

"This means they are less likely to experience income shocks that will reduce their ability to meet mortgage repayments." 

In addition to this, foreclosures in Australia are few and far between due to home loans accounting for most of household debt, which are well collateralised. 

For those loans which did foreclose or had a high Loan to Value Ratio (LVR), lenders were protected by Lenders Mortgage Insurance (LMI).

The paper said Australian mortgages had low LVRS by international and historical standards.

"For example, less than 10%of new Australian loans are written at LVRs above 90%compared to close to 50% of new loans in countries that experienced a boom-bust cycle during the financial crisis (Kelly, Le Blanc and Lydon 2019)."


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

Latest Articles

author-avatar
Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree to the Savings Privacy Policy