Australian house prices: RBA analysis suggests property could jump 30 per cent in three years

Heightened borrower confidence in record low interest rates could push property prices sky-high according to analysis by the Reserve Bank of Australia.

In an internal document accessed via the Freedom of Information Act, the RBA has predicted that home values could rise by as much as 30 per cent within just three years due to borrower belief that rock bottom interest rates are here to stay.

Ultimately, the RBA sees rising asset prices (or home values) as a net positive, despite some economists warning that the unprecedented low interest rates could destabilise the economy.

The internal RBA briefing noted that a rise in house prices (and other assets such as shares) would lead to increased household wealth

and improved cash flow.

As a result, Aussies would get out and spend more, and that in turn would stimulate the economy and business investment.

Therefore, if households are currently benefiting financially from lower mortgage rates, that imminent risk would be diminished.

Long term versus short term sentiment

According to the analysis, a permanent 1 percentage point (or 100 basis point reduction) cut in the official cash rate would increase “real housing prices” by 30 per cent after about three years.

Whereas, if borrowers and homeowners had less confidence in a prolonged rate reduction and believed the low rates were only temporary, then house prices would only rise by about 10 per cent over a three-year period.

However, RBA governor Philip Lowe has all but promised that the 0.1 per cent cash rate will not increase for “at least” three years.

Post-COVID property so far

Australia’s housing market finished 2020 on a strong footing with CoreLogic’s national home value index rising a further 1 per cent in December – the third consecutive month-on-month rise following a 2.1 per cent drop in dwelling values between April and September.

“Monetary policy appears to have larger effects in local areas in which housing supply constraints are binding, mortgage debt is higher and there are more housing investors,” the RBA document stated, adding that much of the credit growth is currently coming from owner-occupiers.

“First-home buyer activity has increased strongly in recent months, a positive indication of access to housing for younger households, according to loan commitments data,” the analysis continued.

Evidence is in the data

Canstar finance expert, Steve Mickenbecker, said of recently released ABS Lending Indicator data;

“First-home buyers are flooding into the market, responding to federal and state incentives and low interest rates,” he said.

“With the property price buoyancy we have seen in some state capitals, fear of missing out will be playing on minds and driving people into action.”

ABS data released this month showed new home lending rose in November for the sixth consecutive month. The new lending figures rose by 5.6 per cent in November to reach a new record of $24 billion, up 23.7 per cent year on year.

“November’s increase in home lending marks six months of momentum, and with housing prices holding up much better than was expected at the start of the run, it’s looking like an irresistible force,” Mr Mickenbecker said.

“The only immovable object on the horizon is the end of JobKeeper in March, but if that does result in forced sales and increased supply onto the property market, it’s hard to see the impact on housing prices being anything but a short lived correction given the current market momentum.”


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