Falling house prices could lead to rising levels of unemployment, the Reserve Bank has warned, putting Australia’s financial stability at risk as the Coalition and Labor turn the election into a test of economic management.
Bank stress tests indicate they can withstand double-digit unemployment rates and house price falls exceeding 30 per cent, but the central bank used its bi-annual review of the country’s financial strength to warn debt and faster than expected house price declines had created “greater-than-usual uncertainty”.
“There is a near-term risk that the delivery of a large volume of new apartments into a weak market could amplify price declines,” the RBA said, suggesting the influx would produce “further downward pressure”.
House prices remain 40 to 50 per cent higher than in 2012 but have fallen by 11.5 per cent over the past 12 months in Sydney and Melbourne, according to CoreLogic, with ratings agency Moody’s tipping another 10 per cent decline this year.
The bank said the ongoing process of loans switching from interest-only to principal and interest payments was a potential source of financial stress.
“These borrowers face a substantial increase in required repayments, often up to 40 per cent.”
Estimates suggest that about $120 billion of interest-only loans – 7 per cent of the outstanding stock – are scheduled to convert to principal and interest repayments in 2019.
The aggregate stock of all mortgage pre-payments remained large, while nearly 30 per cent of loans had no or little buffer, and so appeared more vulnerable, the bank said. The value of housing loans in arrears had also drifted up from very low levels.
Internationally, the RBA said Australia’s largest trading partner, China, remained the biggest threat to growth and that “the likelihood of a near-term trigger has seemingly risen” through historic levels of debt financed through “opaque non-bank channels” and ongoing trade tensions.
This “delicate balance” between pumping up a slowing economy and maintaining financial stability “could falter”, according to the central bank.
Britain’s withdrawal from the European Union was also being watched closely by policy makers, but with little direct trade exposure, the main impact on Australia would be through a generalised tightening in global financial conditions, which is more likely to occur if no Brexit deal was reached.
The report is the latest in a string of ominous messages from local and international regulators that have seen growth forecasts sliced and hopes of a wage rise dimmed for workers.
The sharp deterioration has opened a gulf between the two major parties on their economic outlook as they begin their election campaigns.
The Coalition believes lower taxes will see Australia push through the economic headwinds, while Labor has promised to redistribute the growth to those who it views as most in need.
“It’s a choice between my government that has been delivering a stronger economy – or a Bill Shorten Labor government which would mean a weaker economy,” Prime Minister Scott Morrison said on Friday.
The national accounts show the economy has been slowing under the Coalition’s watch, after the brakes were slammed on in the second half of the year to deliver below-trend growth of 2.3 per cent, well below market expectations.
While company profits have been pushing up steadily, wages have yet to show any real signs of lifting back up to their historic norm of between 3 and 4 per cent.
Mr Shorten said he would continue to point out the disparity up until election day on May 18.
“The problem in Australia is that everything has been going up except people’s wages,” he said. “This economy is not being managed in the interests of working and middle-class people.”
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