What the RBA is thinking about property prices – The Australian Financial Review

Residential property prices have flatlined in the past two months after seeing strong growth before the COVID-19 crisis struck.

The central bank is also looking at the dynamics of people in financial stress and where they decide to live.

"Members also discussed the effect of a possible increase in the number of people moving back home or living in larger households for financial reasons."

"At the same time, the supply of rental housing had been boosted as properties that had previously been offered as short-term accommodation were shifted to the long-term rental market," the minutes said.

The central bank also looked at the buffers households had when it came to paying their mortgages.

"Members were briefed on the resilience of Australian households in the current downturn. Around one-third of households with mortgages had prepayment buffers of three years or more."

"But a smaller share had no mortgage prepayment buffer and were more susceptible to financial stress," the minutes said.

During the week that the RBA board met, the Melbourne Institute's survey showed households were now feeling less financially and emotionally stressed than during the strict lockdown.

"Housing loan arrears were likely to increase," the board meeting minutes said, "but the extent would depend on the severity of the economic contraction and the associated increase in unemployment."

"Loan payment deferrals would reduce the increase in arrears rates for at least the following six months."

The Prime Minister Scott Morrison said last week that banks had now deferred repayments on $220 billion of loans.

Commercial property was likely to take a substantial valuation hit.

"Members discussed vulnerabilities associated with commercial property, particularly for office and retail property."

"A large amount of new office space was expected to be completed in Sydney and Melbourne in 2020. Members noted that demand was not expected to keep pace with stronger supply in the near term and therefore it was likely that vacancy rates would rise and office rents would fall."

"Rising vacancies and reduced rent would be likely to lead to lower valuations, which would pose challenges for leveraged property investors and developers."

The RBA board was also more confident on the effect of COVID-19 restrictions on the construction sector.

"Members noted that some of the concerns that construction activity could be severely affected in the near term by supply chain disruptions and health-related site closures had not been realised," the minutes said.

"The effect on retail businesses of the social distancing measures was likely to exacerbate these problems."

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What the RBA is thinking about property prices - The Australian Financial Review