I googled the actual RBA brief and it was clear that they were doing bank "stress testing".Their assessment was that a 40% house price fall in AUS is a realistic scenario.
To be a valid stress-test, the hypothetical scenario has to be two things: (i) realistic (ii) extreme
The RBA is trying to influence a broad range of stakeholders including the banks plus the federal/state governments. If their hypothetical scenario is not realistic then the RBA loses credibility and they will fail to influence.
In the RBA brief, they talked about 55% house price falls in Ireland and 32% house price fall in USA during GFC.
They must have thought that Ireland's 55% is not realistic in Australia, but 40%IS realistic in an Australian context.So their assessment would have been that a 40% house price fall in Australia is a realistic situation.
As for being 'extreme', it has to be an uncontrollable extreme situation that actually puts Australian banks under stress. Otherwise it is not a 'stress-test'.
