RBA model says house prices may fall 20pc

HOME prices could drop by 20 per cent from the peak in just over two years if pessimism takes hold in the property market, according to an internal assessment by the Reserve Bank of Australia.

The fallout from this “downside housing price scenario” would hit both broader consumer consumption and the hard-pressed building industry.

Bank documents released under Freedom of Information showed its concerns about recent weakness in housing prices, particularly in Sydney and Melbourne, and the effect this is having on dwelling investment.

The documents showed national housing prices unexpectedly fell in the June quarter, reflecting declines in the two major capitals, as auction volumes and clearance rates in these cities dropped.

The bank is assuming price falls in Sydney and Melbourne continue over the second half of this year, with its central case scenario for prices in those cities expected to be off by about 1.5 per cent a month.

It said that price growth has also slowed in other capital cities and regional areas, and this is expected to continue into next year. Prices in these markets would also drop.

The base case would be for national housing prices to decline by 11 per cent peak-totrough by late 2023, and also hit residential construction.

The internal documents said “a steeper cash rate path and declining housing prices are expected to deter demand for new housing, which weighs on dwelling investment further out.”

But in the RBA’s downside housing price scenario, where people become pessimistic about the outlook, housing prices would plunge by 20 per cent peak-to-trough by the end of 2024.

The bank documents said this is roughly twice as large as what it had assumed in its baseline case, and sits below the range of estimates from its models and most market economists.

“This would have an effect on both dwelling investment, especially later in the forecast horizon, and consumption,” the documents warned.

After a long bull market, real estate agents are doing it tough as stock levels dip, interest rates rise and vendors refuse to budge on price expectations.