RBA's Kearns says modelling showing house price declines are not a predeiction.
The Reserve Bank of Australia’s head of Domestic Markets, Jonathan Kearns, said houses in expensive suburbs are the most sensitive to interest rate changes, adding that apartments are less likely to suffer price swings than houses. He attempted to downplay modelling contained in the Bank’s April Financial Stability Review that showed a 15% decline in house prices based on a 200 bps increase in rates, saying “it was not actually a prediction” but rather an estimate of the sensitivity of house prices to interest rates.
However, Kearns said its user-cost model showed that if interest rates were 200 bps higher “forever” then house prices would end up being 30% lower than if interest rates had not changed. However, if interest rate reverted to their initial levels after two years, then the interest rate impact would unwind. Governor Philip Lowe last week said he would not be surprised if home prices fell a “cumulative” 10%.
Kearns partly attributed the higher interest rate sensitivity of houses, rather than apartments, to a limited supply of available zoned land for apartments. Expensive home prices were viewed as more "cyclical". He said RBA modelling showed falls in commercial property prices in response to higher interest rates were slower and smaller in magnitude than residential property. More insight into the impact of higher interest rates on borrowers would be provided in the Financial Stability Review to be released on Oct 7.