RBA house price scenario has 1% chance of success

Via Martin North today:

We have updated our scenarios to take account of a range of new data, and the latest input from our household surveys. A peak to trough fall of 20-30% over 2-3 years remains our base case, but with risks to the downside. On the other hand the RBA’s base case gets only a 1% probability now.

The factors we have taken into account include:

  1. Lower inflation and growth rates ahead according to the RBA
  2. Fed future rate hikes on hold
  3. Potential for more QE (Euro Zone, Japan, others)
  4. Recent home price falls in Australia driven by weaker credit impulse
  5. Underemployment still a significant issue and wages flat

We also have used updated households intention to transaction data, mortgage stress and affordability metrics.

ANZ yesterday revealed their mortgage underwriting standards are now ~20% tighter. Others are even tighter. “Mortgage Power” has been significantly curtailed.

Here are the results from our Core Market Model, with a probability rating.

Business As Usual: RBA driven scenario

Things Can Only Get Better: Economy is weaker, as wages continue to grow only slowly, costs rise, and RBA cuts later in the year. Some Government tax stimulation either before or after the election, or both. Some easing of credit rules so lending growth accelerates.

Not Yet Doomsday: A locally driven downturn, as wages are flat, despite some mortgage rate repricing. RBA cuts significantly. Employment rises, and one Bank requires assistance. Fiscal stimulus does not have significant impact as household consumption falls.

Ireland 2.0: International crisis overlaid on scenario 2, with QE and lower rates, in response. May be from Europe (Brexit), China, or US, or some combination as global growth falls. In response cash rate is cut hard to zero bounds, QE in Australia commences, and banks are rescued/restructured via bail in and bail out.

Iceland 2.0: As above, but no bank rescues, so banks fail. RBA moves to negative interest rates (see Japan).

We discussed these scenarios during our live stream Q&A event last night. Here is the edited version of the event:

I could quibble with some of those macroeconomic forecasts but on the whole the scenarios are reasonable enough.  I agree we are on the path to scenario three. Good job Mr North.

As for the lunatic RBA and its preposterous outlook, no words can capture how bad its analysis from yesterday’s minutes is:

Members noted that some of the dynamics in housing prices could be explained by the fact that the supply of housing does not respond quickly to changes in demand. In particular, the run-up in housing prices had occurred during a period when housing supply had not picked up sufficiently to match higher demand from more rapid population growth. Over time, higher housing prices had eventually led to a sizeable increase in supply, but this had taken longer than in previous cycles. Another factor weighing on prices was a noticeable decline in demand from foreign buyers in recent years, which had also been apparent in housing markets in some other economies.”

What ridiculous partial analysis, completely ignoring that it was the RBA itself that cut the cash rate 275bps between 2012-2016 while also trashing the macroprudential regulatory response to slow lending on interest only loans and to investors.

Of course it did so because it was scrambling to cover its arse after the Bank mistook a two year mining investment spike for thirty year boom.

History will remember the Stevens and Lowe RBAs as monetary dills without equal.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. 20-30% and one bank bailout? That’ll lead to 40% and more bailouts, QE and the pacific peso at 40c

  2. Not sure about ONE bank bailout.

    If one goes, they all go. Their balance sheets (and therefore risk) are much of a muchness.

    The taxpayer will wear this one in a major way. The only question is the extent to which equity holders are diluted (if at all).

    • Yep, and when that happens, government debt (as a percentage of GDP) will be going to the moon (I’m calling ~160% of GDP as the high target).

      • I damn near start to shake when I think about this stuff. Govt debt goes to the moon as our credit worthiness goes to hell in a variety of wooden hand carts. Land tax on retail and industrial buildings quadruples? Cascades and avalanches everywhere. Strewth! There will be nothing left!
        What’s your vision of how the movie goes? I’m certain very few have actually thought about all the chain reactions in this.

        P.S. Of course – all the mad b…tards are going to try printing – so who knows what it will look like nominally.

  3. I get the feeling that Mr North doesn’t believe that it will stop at the not yet doomsday collum, he is very aware of the geopolitical background and perhaps doesn’t want to be associated with Mr Keen.

    • Yup, experience shows that it pays to be ‘measured’ with bearish forecasts — so far, at least.

      One day, however, the most pessimistic forecasts will come to pass.

  4. As far as I’m concerned the only thing that is driving case 2 to become case 3 is the public perception of house price decreases coupled with the big4 bank’s unwillingness to lend in a manner that supports current prices.
    Anecdotally young buyers are standing on the side lines while developers step in to buy inner west and lower north shore properties for redevelopment. The bargains are being snapped up, but this can’t last forever. The parts of Sydney that I’m referring to have been the worst effected with most redevelopment properties already changing hands at 20% to 25% peak to trough declines. The corelogic figures for these regions were extremely strong coming from sub 20% clearance rates over the last 4 months to 40 maybe even 50% auction clearance rates last weekend and the good results the previous Saturday.
    The next few weeks will be critical but personally I think we’ve put in a bottom, it might be just the beginnings of a “dead-cat-bounce” but who can say. Suffice to say that smart redevelopment money is buying based on location, location and location. I suspect this fact alone tells us exactly where we’re at on the current RE cycle.
    My bet is upward prices movements for house close in to the city (5 to 10 km) and price / volume stagnation for the outer western regions. of Sydney.
    It’ll be interesting to see if the banks and buyers come to the party or leave the property re-developers hung out to dry, but that’s really a question for 2020.

    • Maybe. Fortune favours the brave I guess.

      But there is a whole generation of developers who have never experienced a recession. Bravery today could be stupid tomorrow.

      • It will be interesting to see what they develop.
        If the market fails for putting 2 new McMansions on 500sqm lots (old 1000sqm /2 ) than the redevelopment trend will probably shift to trying to put 6 apartments on the same foot print.
        The two McMansions need to sell for something north of $2M each so it will be a difficult market segment to sell into if the Property Ladder fails to deliver Equity to those successful speculators trying to climb the ladder into better digs.
        In a way the best outcome for supporting lower density in Sydney 5 to 10 km radius is that the new/redeveloped $2M + housing market recovers. I know this is the opposite of what a lot of MB’ers wish for but I’ve talked with some of these developers and it’s pretty much what they’re planning.
        Plan A is two McMansions
        Plan B is 6 plus apartments (very squeezy and lots of traffic problems)

      • The thing people need to remember about developers is that they are not traders or market timers. This is their livelihood and they need to keep on building come what may — many have full-time staff to look after. It is only the multi-millionaire / billionaire developers that can afford to pare down their portfolios and take a break from it all. Even then, they will likely take a financial hit.

      • Good point Dominic.
        Successful small RE developers try to keep their teams and subbies fully loaded with work.
        It’s just what they do, so if the end market shifts in such a way as to make it unprofitable to build McMansions they’re going to push councils hard to redevelop the site at higher density so that it will be profitable for where the market is at. In so doing they guarantee a quick sale at the end of the project.

  5. harry petropoulosMEMBER

    As a veteran real estate agent in Brighton explained it to me in his harsh comments!!!
    An average 3 bedroom house in Brighton at the end of 2016 got sold for 1.76 million………….the same house got sold 2 weeks ago got sold for 1.39 million dollars.He believes in 2-3 years time the same house will sell for 1.1 million.So I did the maths and it equates to a 37% fall………………..its about bloody time!!!

  6. “In particular, the run-up in housing prices had occurred during a period when housing supply had not picked up sufficiently to match higher demand from more rapid population growth.”
    RBA know during the last boom half the property transactions were by investors/super. They know most of these are negative yield investments. These are facts. So just based on this how you go to ‘population growth demand/supply’ conclusion, and not to ‘investor negative gearing/capital gain speculative demand’ is laughable.

  7. Jumping jack flash

    “History will remember the Stevens and Lowe RBAs as monetary dills without equal.”

    To be fair, you can’t be too hard on them, they were just jumping on the global debt bandwagon and using anything as an excuse to do so.
    “Hey look! A spike in mining investment! Righto, interest rates to the floor, bring on the debt bonanza, and with it infinite riches!”

    The problem now, globally, is the insane amount of unproductive debt that sucks money for the interest out of the system with every repayment that is made. They seem to be missing that crucial detail entirely.
    I suppose that makes sense because the people in charge of this mess are all bankers.

  8. Auction clearance rates must be considered along with volumes. The volumes from what I recall at very low indeed compared to previous boom times- around 1/3 to 1/2 at best. Auctions are off the boil and no longer trendy. I went to an open for inspection in Melbourne last week for an apartment and it was just me and another couple. I was there just for a sticky beak to judge what I want when the price is attractive enough down the track.