The Reserve Bank of Australia (RBA) said Aussies should prepare for higher interest rates, which will in turn hit property prices.
In its Financial Stability Review, the RBA said both banks and borrowers needed to consider the potential for a drastic drop in property prices.
“After nationwide housing prices increased by 22 per cent over 2021 (the strongest annual growth rate since the late 1980s), the pace of housing price growth moderated in most markets in early 2022,” the review said.
“Future increases in interest rates could also weigh on housing and other asset prices.”
The RBA compared the historical relationship between interest rate rises and both supply and demand factors and estimated a major fall in property prices could be on the horizon.
“A 200 basis point increase in interest rates from current levels would lower real housing prices by around 15 per cent over a two-year period,” the bank said.
The bank said higher interest rates will increase borrowers’ debt payments and higher inflation will reduce the ability of Australians to make those payments.
“...particularly if incomes do not increase alongside higher interest rates,” the bank said.
“Household debt relative to income is high compared to other countries and to historical levels,” the bank said.
“Most households are well placed to meet higher debt payments because they have been making excess mortgage payments in recent years.
“However, high levels of household debt can lead to reduced spending should incomes fall or expenses rise.”
The RBA said that tightening lending standards, as was done by the Australian Prudential Regulation Authority (APRA) late last year, should help.
“APRA has strengthened its prudential oversight of individual banks to ensure standards are being maintained and the risks associated with high debt-to-income portfolios are being properly scrutinised,” the review said.