PHOTO: Reserve Bank of Australia
The Australian property market could reliably withstand an ‘extreme’ scenario of dropping 40 per cent in value at a time of high unemployment, a discussion paper issued by the country’s central bank has found.
The paper, titled ‘How risky is Australian household debt?’, examined the risks posed by the housing market’s increasing indebtedness, the stress a strong downturn would place on the banking system, and the effects it would have on people’s everyday spending.
How would we cope with a dire economic scenario?
A scenario where property prices dropped by 40 per cent and unemployment rose to 8 per cent was simulated using detailed household-level data — data that predates the COVID-19 pandemic — to stress test the banking system and consumer spending.
“We believe this is an extreme but plausible scenario, which is broadly in line with the shock experienced by some countries during the global financial crisis,” the discussion paper said.
“…(It) is comparable to (property) falls experienced in countries that were heavily affected by the (global financial) crisis, including the United States (32 per cent fall), Spain (37 per cent fall) and Ireland (55 per cent fall).”
Due to the COVID-19 pandemic, Australia’s unemployment rate is forecast to hit double digits before settling at 7 per cent for a few years, according to the Reserve Bank of Australia, but government stimulus payments have been introduced to subsidise a loss of income for many.
The simulation aimed to identify the households that would throttle their spending and default on their mortgage repayments.
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