Australia's central bank sees house prices falling 7% over the next year

Sydney

AUSTRALIA'S central bank expected house prices to fall 7 per cent in the year ahead under its baseline scenario for the Covid-19 pandemic, documents from May released under a Freedom of Information request showed.

In the upside scenario for the economy, prices were forecast to slide 2 per cent. Yet, prices could plunge as much as 15 per cent under the downside scenario.

This is according to a research paper produced by the Economic Analysis Department dated May 18 and released on Wednesday by the Reserve Bank of Australia (RBA).

"In our baseline and upside scenarios, some degree of forbearance by the banking sector is assumed to mitigate larger declines in prices caused by forced sales and financial stress," the department said in the document.

"In the downside scenario, on the other hand, banks are not able to forbear to the same extent, leading to forced sales and some tightening in credit."

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Australian home prices fell in May for the first time in almost a year as the impact of the coronavirus shutdown rippled through the economy.

The limited impact on prices at the height of the lockdown raised hopes that the housing market might not suffer as much as feared, but the real test will come later this year when assistance packages are scaled back.

Currently, almost 430,000 borrowers are on six-month payment holidays, and around 2.9 million workers are receiving government wage subsidies.

The RBA said in the documents that its housing price forecasts for all three scenarios were primarily driven by confidence effects.

It forecast the rental vacancy rate to increase and rents to decline, noting that the number of residential rental leases subject to discount and rent deferrals had "picked up significantly".

The "downward pressure on rents is expected to weigh on housing prices over the medium term", the central bank said.

"Social distancing measures are expected to have an even larger effect on the number of housing transactions than on prices; housing turnover is expected to decline by 70 per cent in the June quarter, and remain low in the September quarter," the documents showed.

Under the RBA's baseline scenario, the trough in housing construction activity now is foreseen in early 2021, two quarters later than previously expected.

In a separate document referencing the central bank liaison, industry players reported large falls in demand as a result of virus containment measures and the weaker economic outlook.

"Looking ahead, most contacts expect sales of new housing to continue declining because of weak buyer sentiment, tight financing conditions and a decline in overseas migration. Contract cancellation rates are expected to remain elevated," it said.

"Builders of detached housing continue to report concerns that weak demand will weigh on construction activity beyond their current pipeline (around four to nine months)," the documents showed.

"The pipeline of residential construction work in the major east coast markets is at the longer end of this range, they said.

"Some high-density developers are delaying commencements because of weak off-the-plan sales, downward pressure on valuations and tighter access to finance." BLOOMBERG