Media outlets have published various articles over the last week with a range of tantalising headlines that declares something along the lines of: RBA predicts up to 40 percent drop in house prices.

Now, if you’re a first homebuyer or someone who is keen to get your foot on the property ladder, this might seem like good news. Finally, Sydney prices might fall back into reasonable territory!


Wrong – it’s just not going to happen.

Those who own their own home or have an investment property may read this type of headline and find themselves worried and anxious about the value of their properties – yet another thing to fret about in 2020.

These headlines are successful in that they generate “clicks”. But they also feed into people’s fears and insecurities. As a community, we talk about RUOK? Day but it’s important to do more than talk – when we see an opportunity to educate, inform or support others so they sleep easier at night, then it’s our duty to take it.

As a property and finance journalist with more than 15 years experience, who has interviewed more economists, bank executives, industry CEOs and researchers than I’ve had hot dinners, I’ve been exposed to a broad range of insights and expertise about the drivers of growth and influences over the Australian property market.

And so, before you get too concerned, I’d like to offer another viewpoint.

What will stop property values from falling 40 percent?

Australian property prices are not likely to collapse by 40 percent – and the latest research from the Reserve Bank of Australia (RBA) did not suggest that they would.

In fact, the headline “predicts a potential 40 percent drop” is misleading, because that’s not what the RBA suggested at all.

Rather, the RBA investigated what the effect would be of a 40 per cent fall in house prices.

Report authors Jonathan Kearns, Mike Major and David Norman created a research document, “How Risky is Australian Household Debt?” in which they investigate the current state of play in regards to household debt in Australia.

Within this context, there is a section of the report where the authors explore “stress testing household debt”.

Their aim is to “assess how the presence of (and increase in) debt may affect households’ consumption in a period of stress” and involves a “severe hypothetical stress scenario”.

“The scenario involves employment falling by 8 per cent and housing prices falling by 40 per cent. We believe this is an extreme but plausible scenario, which is broadly in line with the shock experienced by some countries during the global financial crisis.”

A few notes here:

  • Australia is not one of the countries that experienced a 40 percent price collapse in during the GFC. Our banking and finance systems were very different and far more robust than the US (which did suffer up to 40 percent drops) and following more than a decade of regulatory reform, they’re even more risk-averse today. A huge part of the reason why the US housing market collapsed was due to non-recourse loans – something we don’t have in Australia.
  • The RBA is not “predicting” a 40 percent price collapse. They are modelling what might happen to households in Australia, if such a situation were to arise. Which brings me to point number three…
  • Our government won’t allow property prices collapse 40 percent.

They will step in with regulatory change, tax reform, grants and subsidies, infrastructure investments and other measures first.

Look at how the federal government has stepped in since the pandemic began causing economic carnage in March: billions of dollars in grants, subsidies, lifelines and projects have been announced.

Or to be more property centric, look how they responded when Sydney and Melbourne markets boomed a few years back. Investors were penalised with higher interest rates, lenders were forced to limit the number of landlords they lent to, and other measures were taken to take some of the heat out of the market.

In Australia, real estate and related industries employ more than one million people. Property is the biggest driver of household wealth and trading real estate is the biggest contributor to state budgets (in the form of stamp duty).

For these reasons and many more, our governments, policy makers and leaders are likely to take action and assist in adjusting the course if it looks like our real estate markets are headed towards a wholesale crash.

Why “predictions” like this can be dangerous

Of course, there’s no predicting what will happen in the future, particularly as the pandemic continues to throw economic curveballs.

Here’s why this type of reporting is so reckless, though: people are already stressed out. We’re already living in “uncertain” and “unprecedented” times.

Hundreds of thousands of Australians have lost their jobs, or have some work/income, but nowhere near enough to keep themselves afloat indefinitely. Our Victorian residents are still living in lockdown.

Some small businesses simply won’t survive the pandemic and the collective amount of stress, doubt, worry and concern about what lies ahead has never been greater.

In the face of all of this, the last thing people need is to worry that their property values are going to collapse, too – especially when the likelihood of that happening is so very small.

So, where to from here?

In times like these, I like to defer to the experts who really know their stuff and one such economist I always trust is Dr Shane Oliver, head of investment strategy and economics and chief economist at AMP Capital.

Oliver has decades of economic experience and in his regular insights columns, he delivers the latest economic news in an easy to read way, without all of the spin and hubris that click-bait articles tend to generate.

In his most recent update, Oliver wrote: “Australian home prices at present are being protected by income support measures and bank payment holidays but higher unemployment, a stop to immigration and rent holidays will push prices lower into next year. Home prices are expected to fall by around 10-15 percent from their April high.”

Keep in mind that this is a broad statement (as each individual state and city’s property markets operate according to their own drivers of growth) and that since April’s peak, many markets have already experienced a decline in median values of 2-5 percent.

This means that some markets may experience a median decline up to a further 5-10 percent in the next 6-12 months, but this does not apply unilaterally.

In some sought after, affordable family suburbs on the Gold Coast, for instance, demand is currently very high. I know of a vendor who just listed their three-bedroom family home for sale with an expectation of $650-680,000. The agent suggested they could achieve a price with a seven in front of it. At the first open house, 34 groups came through and seven offers were made!

The home is now under contract for $728,000.

Conversely, just a couple of suburbs away, I know of a far bigger, more opulent four-bedroom home with a pool that was listed for $925,000 just as the pandemic hit. It’s not as affordable and appeals to a smaller pool of potential buyers. With less demand, it sold and settled in July for $800,000, as the sellers were desperate to move on.

This right here is the unspoken truth of the property market: at a macro level, there is data and research to support all sorts of trends and insights. But when you get down to it, at a micro level, it is heavily influenced by personal circumstances. 

Which leads me to my last very important point. Even if your house is located in a suburb or area that experiences a decline, and even if that decline reaches the very worst of Oliver’s predictions at 15 percent, this only becomes a problem for you if you absolutely need to sell.

If you’re worried you might end up in a position where you have to sell your property for a loss, get proactive now. Our survival guide might help investors. There may be small, affordable yet impactful renovations you can do you increase the value of your home. And you can speak to your bank or lender about the potential for extending your loan deferral period for a further four months.

Just be careful not to get too preoccupied with “predictions” at a time when no one can predict anything with any certainty whatsoever.

Do your best to be clear-headed, focus on the facts (rather than speculation) and seek professional advice where needed. And, don't get too ahead of yourself: stay tuned on the next three months – no more, no less – and you’ll be well placed to avoid the emotional rollercoaster that the news cycle can take you on.