Reserve Bank warns house prices could fall 40% as COVID-19 smashes the economy and causes a surge in unemploymentThe Reserve Bank of Australia says a 40 per cent house price drop is ‘plausible’Such plunge would see Sydney’s median house price plummet to just $600,000 That is based on unemployment rising as coronavirus destroys the economy 

The Reserve Bank of Australia is warning a 40 per cent fall in house prices is ‘plausible’ as coronavirus pushes up unemployment to 1990s levels.

Even before the COVID-19 crisis, Australia already had the world’s highest household debt levels after Switzerland.

A surge in unemployment to double-digit levels unseen since 1994, as a result of  from coronavirus trading restrictions, is set to force struggling home borrowers to sell.

In those circumstances, the Reserve Bank said an eight per cent fall in employment levels could see ‘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,’ it said.

The Reserve Bank of Australia is warning a 40 per cent fall in house prices is ‘plausible’ as coronavirus destroys the economy. Such a scenario would see median house prices in Melbourne (pictured) dive from $793,548 to $476,129

This would see many borrowers owing their bank more than their home was worth – a situation known as negative equity.

Should such a scenario occur, Sydney’s median house price would plunge from $1million to just $600,000, going by CoreLogic data.

Melbourne’s equivalent house prices would dive from $793,548 to $476,129.

The plunge in real estate values would be ‘more extreme’ than the 20 per cent drop that occurred during the aftermath of the 1990s recession that saw the jobless rate peak at a six-decade high of 11.2 per cent – as unemployment stayed in the double digits for three years.

Nonetheless, the RBA said a 40 per cent drop in Australian house prices would be comparable with the GFC a decade ago, which saw property values fall by 32 per cent in the United States, 37 per cent in Spain and 55 per cent in Ireland. 

The central bank is forecasting the official jobless rate rising from a 22-year high of 7.5 per cent in July to 10.5 per cent by the end of 2020 – a level unseen since early 1994.

Making matters worse, Australia’s debt-to-income ratio of 186.5 per cent is the second highest in the world after Switzerland’s 211 per cent. 

Despite forecasting a severe drop in house prices, the Reserve Bank paper titled, How Risky is Australian Household Debt? – by Jonathan Kearns, Mike Major and David Norman – argued high household debt levels weren’t a problem because it reflected high incomes and a high level of individuals owning rental properties. 

Sydney’s median house price would plunge from $1million to just $600,000, going by CoreLogic data. Pictured are new homes at Kellyville in the city’s north-west

The paper overlooked how Australian wages growth had been stuck at below-average levels for the past seven years. 

Digital Finance Analytics principal Martin North said house prices would likely to dive as home borrowers and struggling small business owners were forced to sell – causing the property market to be flooded with a supply of homes.

‘We have some of the highest debt-to-income ratios in the world,’ he told Daily Mail Australia.

A monthly survey of 1,000 small and medium-sized enterprises by Digital Finance Analytics found more than a third of them feared their business wouldn’t existing in six months’ time – further exacerbating the house price crisis.

‘The immediate crisis comes from the SME sector,’ Mr North said. 

‘A proportion of those have a residential property so effectively, the residential property which is security for their business could be at risk because of the failure of the business.’ 

On August 14, National Australia Bank chief executive Ross McEwan said struggling home borrowers would be better off selling their houses before prices fell. 

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