The logic I hear all the time is the RBA won’t let home prices fall too far because of the financial stability risk consequences. But that view might be plain wrong.
First the RBA has lifted rates by 2.25 percentage points since May, and markets expect the cash rate to reach 3.3 per cent by the end of the year, before peaking at 3.9 per cent in April next year. RBA governor Philip Lowe said last week there was a “narrow path to a soft landing” for the Australian economy, which would be difficult to stay on if global economic conditions deteriorated.
And reflect on this. Within a 24-hour period this week, there will be 16 central bank decisions including the US, UK, Japan, Switzerland, Norway and Taiwan. Cumulatively, we could see over 500 bps in rate hikes across the globe this week.
In addition, Westpac came out yesterday with a revised forecast for the RBA Cash Rate, saying “We now expect the Reserve Bank Board to raise the cash rate by 50 basis points in October for a terminal rate of 3.6% by February (revised up from 3.35%)”. It seems the RBA is giving the green light to home price falls. Because if prices fall you would need a smaller mortgage (even if the interest rates were higher). Let that sink in.
Those who are arguing the RBA won’t be prepared to let home prices fall very far, take note!
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