Reserve Bank now predicting up to 20% house price fall from peak

Thursday, 18 August 2022

The Reserve Bank is now predicting house prices could fall up to 20% from their peak.

The forecast brings the central bank in line with the more pessimistic forecasts from retail banks.

During Wednesday’s monetary policy statement media conference, Reserve Bank Governor Adrian Orr said a reverse-wealth effect was likely to grip the economy.

The wealth effect describes homeowners’ propensity to feel richer when house price rise, and go out and spent as a result.

He said falling prices would have a belt-tightening effect, and that constraint on consumer spending was needed.

“Through all of this though employment levels remain very high,” he said.

When asked at what point the house price falls would become a concern for the bank, Orr said prices were now coming back to what it would consider a sustainable level.

“That’s a good thing, it removes financial stability risks, and we are pleased with that,” he said.

Orr said the Reserve Bank did not have a target for price falls.

“We have been saying to many people - think very hard before making significant large lifetime purchases such as a home.'

Orr was also blunt when asked about concerns for people who bought at the height of the market last year, were highly indebted, and might struggle to meet their obligations.

“We were making as much noise as we possibly could to people over the last two years about ‘think wisely, there’s no such thing as a one-way bet when taking risk',” Orr said.

He said interest rates were “survivable” but for some recent buyers it would mean belt tightening.