Home prices were predicted to drop 7% in the year ahead, documents from the Reserve Bank of Australia (RBA) revealed.

This was the central bank’s baseline scenario for the COVID-19 pandemic, which could also result in a 2% percent decline in prices in the upside scenario and as much as 15% slide under the downside scenario.    

The research paper was produced by the Economic Analysis Department dated 18 May and released by the RBA on Wednesday.

“In our baseline and upside scenarios, some degree of forbearance by the banking sector is assumed to mitigate larger declines in prices caused by forced sales and financial stress,” the department said in the document.

“In the downside scenario, on the other hand, banks are not able to forbear to the same extent, leading to forced sales and some tightening in credit.”

Australian home prices dropped in May for the first time in almost a year as the economy struggled from the effects of the coronavirus crisis.

Although the COVID-19 shutdown has limited impact on home prices at present, experts believe that the market will feel the true effects later this year when stimulus packages run out. 

Data from the Australia Bank Association showed that almost 430,000 borrowers were on six-month payment holidays, while government numbers revealed that 2.9 million workers were receiving wage subsidies.

The RBA said that the price forecasts for all three scenarios were drawn from consumers’ confidence in the economy.

The central bank also predicted rental vacancy rates to rise and rents to fall as the number of “residential rental leases subject to discount and rent deferrals had picked up significantly.”

“The downward pressure on rents is expected to weigh on housing prices over the medium term,” RBA said.

"Social distancing measures are expected to have an even larger effect on the number of housing transactions than on prices; housing turnover is expected to decline by 70% in the June quarter, and remain low in the September quarter.”