“We now expect housing prices to decline over the next few years. This reflects the continued slowdown in market momentum and rising expectations about the future path of interest rates,” they said.
The bank raised interest rates to exert downward pressure on inflation. Figures from the Australian Bureau of Statistics on Wednesday are expected to show an annual inflation rate above 7% for the first time since 1990.
Last weekend, the auction win rate was flat at 62% in Sydney and 64% in Melbourne. In both cities, however, a large number of properties were either withdrawn from auctions or passed on.
Household consumption is the largest part of the national economy, accounting for over 60% of GDP.
Internal documents show that the bank knows that household spending is expected to decline slightly as house prices fall. Lower prices will also hit household wealth, which peaked at nearly $15 trillion in March but fell $484 billion in the June quarter.
“Bigger-than-expected declines in house prices and hence household wealth would pose a downside risk to consumption,” he said.
The documents also show that the bank expects capacity constraints, which have plagued the housing construction sector, to continue at least until the middle of next year. There is a growing risk that higher interest rates will also push more builders into the wall.
“Binding capacity constraints, which are expected to last until mid-2023, are now expected to limit the rate of growth and the level of investment in housing,” notes a document.
“Strong growth in labor and material costs should squeeze margins and increase the risk of insolvency.”
The RBA’s forecast of a drop of up to 20% puts it close to most major banks.
NAB rocks a fall of 17.9% across all capitals from market peak to market low, with bigger falls of nearly 22% in Sydney and Melbourne.
Canstar finance Steve Mickenbecker said forecasts of steep price drops would weigh on the market, particularly among first-time buyers who may be waiting for a cheaper property.
“If you decide to buy too soon, first-time home buyers’ equity will plummet alarmingly and leave them with significant debt. Conversely, being conservative can see them miss out if price projections have been too alarmist,” he said.
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