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.

The RBA document, released on January 15, suggested one of the major risks to the Australian economy is the pandemic-induced high level of unemployment, which by November 2020 was sitting at 6.8 per cent. Therefore, if households are currently benefiting financially from lower mortgage rates, that imminent risk would be diminished.

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.

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*Kristen Craze - News Corp Australia Network January 2021