AUSTRALIAN home prices will likely tumble another 15 per cent this year as part of the largest property decline on record, Jarden Securities said, predicting the Reserve Bank of Australia (RBA) will increase interest rates to 4.1 per cent by May.

The yearlong housing downturn had been losing momentum of late, driven by hopes of a pause in the RBA’s tightening cycle, economists Carlos Cacho and Anthony Malouf said. But the RBA’s surprisingly hawkish turn Tuesday when it hiked to 3.35 per cent and signalled more to come “risks upending this budding optimism”, they said.

“We now see too much downside risk to our long-held forecast of a 15-20 per cent peak-to-trough fall in house prices and downgrade to a 20-25 per cent correction,” the duo said in a note on Thursday (Feb 9). “This would be the largest correction on record.”

So far, prices in the A$9.2 trillion (S$8.5 trillion) housing market have tumbled almost 9 per cent from an April 2022 peak. Jarden, an investment firm, had previously forecast the RBA’s terminal rate at 3.6 per cent.

While a correction is welcome after prices surged more than 28 per cent during the pandemic, when the cash rate fell to a record-low 0.1 per cent, a crash would intensify recession risks given Australian households are among the most indebted in the developed world.

A debt-to-income ratio of 188.5 per cent makes them vulnerable to rising borrowing costs, with the average mortgage rate seen climbing above 6 per cent this year.

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Jarden’s Cacho and Malouf see a drag in earnings for property firms including REA Group, Domain Holdings Australia and Pexa Group.

They are “cautious” on consumer discretionary spending sector such as Harvey Norman Holdings and JB Hi-Fi. BLOOMBERG