Uncategorized
Reserve Bank considered asking for real estate transaction ‘pause’ amid property crash fears – ABC News

Reserve Bank considered asking for real estate transaction ‘pause’ amid property crash fears – ABC News

Reserve Bank economists considered urging the Federal Government to shut down the real estate industry, “pausing” sales of established homes to avoid perceptions of a coronavirus-inspired housing market crash.

Key points:

Highly classified documents from inside Australia’s central bank also suggest house prices could slump up to 15 per cent.

The internal reports contradict a much rosier public view the Reserve Bank of Australia has been displaying about the billions of dollars and millions of jobs tied up in housing, construction and real estate.

Minutes of the board’s May 5 meeting, released publicly, noted “demand for both new and established housing had fallen” and falling incomes, confidence and population growth “were expected to affect demand for new housing for an extended period”.

But inside the RBA, which sets key interest rates and economic direction, the warnings were clearer and more severe.

“It’s become clear that there has been a big drop-off in demand for new housing,” said speaking notes for assistant governor (economic), Luci Ellis, which were obtained through a Freedom of Information (FOI) request.

Beyond difficulties inspecting and selling houses, people were worried about job security.

“Contracts are being cancelled, early-stage buyer interest is very weak and the pipeline is emptying,” it noted.

“Anything that hadn’t already been started has been deferred”.

A day earlier, there were more stern warnings in a “COVID-19 liaison messages update”.

“Demand for new housing has declined substantially since mid-March and is expected to decrease further,” it read, with “sharp falls in sales, enquiries and foot traffic [and] increases in contract cancellation rates”.

A sharp fall in house prices is predicted in a note marked “highly restricted” and created on April 18.

“Housing prices are expected to decline by around 7 per cent over the next year. Prices are expected to remain around 10 per cent lower than at the February Statement over the forecast horizon,” it read, putting most of this down to a loss of confidence because of COVID-19.

The overall security of the banking sector — and its ability to weather some mortgage failures — will “mitigate larger declines in prices caused by forced sales and financial stress”.

The fall in house prices could be as little as 2 per cent in the best scenario, “in the downside [worst scenario] prices fall by 15 per cent”.

Real estate shutdown considered

A businessman walks past the Reserve Bank of Australia in Sydney

In April, economist Nick Garvin wrote to colleagues, warning them the RBA should stop discussing the housing market as if it were operating normally, and calling for a halt — as happens to stock market trading in emergencies.

“I think it’s dangerous for regulators to be reporting on housing prices as though the market is currently functioning,” he wrote.

“I’d suggest we classify the market as paused, and treat the prices observed before the pause as the current prices — like how equity markets operate, but on a larger scale.”

The “pause” would not mean there was no activity, he wrote, “although it could indeed be wise to recommend that the [Government] temporarily halt all sales of established dwellings”.

Shutting down real estate sales would send a statement that “we’re in a different category of situation” and that normal reporting of clearance rates and average prices was “misleading”.

Even without shutting all sales, pausing reporting on the market would “be a fair classification” because real estate agents could not work normally.

“If people start mistakenly thinking that we’re experiencing a housing market crash, it’s not going to help things,” he added.

Bank may have prompted HomeBuilder scheme

The RBA’s reports on the deteriorating situation in construction may have influenced the announcement of the Government’s HomeBuilder program in early June.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume.

In an April report marked “highly restricted”, the Reserve Bank warned the industry was staring at a cliff.

“Although some builders and developers have sufficient work for the next four to six months, the weakness in demand for new housing and the potential deterioration of financing conditions pose downside risks to future activity,” it said.

In Melbourne, some of the RBA’s contacts have seen new home sales drop by half.

By May, things were worse: “Builders of detached housing expect weak demand to weigh on construction activity and cash flow beyond their current pipeline (around four to nine months). Builders and developers report that domestic banks and non-bank financiers have become more conservative in their lending.”

“Most firms intend to defer or cancel investment, many firms have reduced staff hours worked (more so than headcount) and an increasing number of firms expect to implement a wage freeze in the year ahead.”

SQM Research founder Louis Christopher said the documents showed the depth of concern the bank held about the real estate market — and the huge number of workers employed in constructing new housing.

“Clearly the RBA was very worried about the housing market at the beginning of April,” he said.

“Their concerns may have been the prompt for the Federal Government to offer recent grants on new housing as the steep falls in dwelling investment was their primary concern.”

The scheme was announced on June 3.

Safe as houses?

In May, Australia’s largest bank warned house prices could fall 32 per cent in a “prolonged downturn.”

An economist at the Commonwealth Bank, which holds more Australian mortgages than any other, warned that under a “worst-case” scenario, house prices would fall by almost a third from their March 2020 peak over the next three years.

CBA’s chief executive Matt Comyn told ABC TV’s The Business the bank had to plan for the worst.

“We need to be prudent and consider a realistic downturn but also plan for a worst-case scenario, and that would see a sustained increase of unemployment,” he said.

House prices were lower in May according to research firm CoreLogic, ahead of larger concerns with mortgage “pausing” — the temporary halt of payments — ending in September.

National house prices fell an average of 0.4 per cent, but there was a significant variation across regions.

Payments on more than one in 14 mortgages in Australia are currently “paused” by the major banks.

The Australian Banking Association revealed repayments on 429,000 mortgages worth $153.5 billion had been put on hold so far.

This content was originally published here.

Leave a Reply

Your email address will not be published. Required fields are marked *

SPIN TO WIN!

  • Try your lucky to get discount coupon
  • 1 spin per email
  • No cheating
Try Your Lucky
Never
Remind later
No thanks