Property Prices Not Endangering Financial Stability

The RBA’s Kearn, Head of Domestic Markets, spoke at the AFR’s Property Summit Today on "Interest Rates and the Property Market". He looked at the connections between rates and property prices, and stated that he was not going to discuss the current drivers of monetary policy as Governor Lowe had done so at the Anika Foundation event.

• Kearn noted in his conclusion that the financial risks from falling property prices currently appear contained given low leverage rates in both residential and commercial property but the RBA is monitoring developments closely. The next Financial Stability Review will be published on October 7.
• He commented that the higher-than-normal proportion of fixed-rate loans of 35% and the large number of excess mortgage payments is easing the impact of tightening so far.
• RBA sensitivity analysis shows that real house prices fall 15% over 2 years in response to 200bp of rate hikes and if sustained, 30%.
• There is significant uncertainty regarding the size and timing of the effect the current tightening cycle will have on property prices given the numerous other factors and that property reacts with a considerable lag.
• Kearn noted that the current tightening of 225bp is likely to have reduced the maximum loan size by about 20% and increased the monthly repayment on anew loan by about 25%.