The warning from AMP Capital chief economist Dr Shane Oliver came as the Reserve Bank left the official cash rate on hold at 1.5 per cent for the 23rd month in a row, extending the record streak without a change.
Data released by research firm CoreLogic on Monday showed national house prices fell for the ninth consecutive month in June to be 1.3 per cent lower than their September 2017 peak, leaving recent home buyers “facing negative equity”.
“Overall, Sydney and Melbourne are likely to see a top to bottom fall of around 15 per cent spread out to 2020, but for national average prices the top to bottom fall is likely to be around 5 per cent,” Dr Oliver said in a client note.
“A crash landing is unlikely in the absence of much higher interest rates or unemployment, but it’s a risk given the difficulty in gauging how severe the latest tightening in bank lending standards in the face of the Royal Commission will get.”
Last month, ANZ said it had “materially downgraded” its outlook for the housing market and now expected to see declines of “around 10 per cent peak to trough” in Sydney and Melbourne.
Dr Oliver said the ongoing house price falls would depress consumer spending as the “wealth effect” goes in reverse. “It’s consistent with our view that the RBA will leave rates on hold out to 2020 at least,” he said.
“Home price weakness is at levels where the RBA started cutting rates in 2008 and 2011, so while it’s not our base case we still can’t rule out the next move in rates being a cut rather than a hike.”
The RBA last cut the cash rate to its record low of 1.5 per cent in August 2016, following an earlier cut to 1.75 per cent in May. There has not been an official cash rate increase since November 2010.
CoreLogic head of research Tim Lawless agreed that it was looking increasingly likely that the RBA would leave the cash rate on hold throughout 2019.
“Focus is now moving to mortgage rates, where we are increasingly seeing upwards pressure from overseas funding costs,” he said.
“Already, smaller banks and non-banks, who are generally more exposed to wholesale debt costs, are pushing interest rates higher for select mortgage products.
“Larger banks, who are more reliant on domestic deposits to fund their home loans, have less exposure to higher funding costs. However, it is likely margin pressures are becoming evident across the big end of town as well.”
Steve Mickenbecker, finance expert from comparison website Canstar, said the RBA was unlikely to move the cash rate up until wage growth picked up from where it was “stubbornly” sitting at around 2 per cent.
“It wants to feel that borrowers have built up the capability to meet higher repayments,” he said. “Canstar has calculated that loan repayments are averaging just above 40 per cent of average after tax earnings. This level is too high for comfort.”