The Reserve Bank governor says he wouldn’t be surprised if Australian house prices fall by an average of 10 per cent.
Philip Lowe said he thought house prices could fall but it was unlikely they would return to pre-pandemic levels given how much they surged by over the past two years.
“It’s hard to forecast asset prices and prices went up 25 per cent over the past two years – a very, very big increase,” Dr Lowe told a parliamentary economics committee on Friday.
“It would not surprise me and this is not a forecast but it would not surprise me if prices came down by 10 per cent. And even if they did that they’re still up 15 per cent over three years.”
Dr Lowe has been put in the hot seat at a hearing examining the central bank’s five-month streak of rapid interest rate hikes as part of its mission to return inflation to between 2 and 3 per cent.
With inflation running at a 30-year high of 6.1 per cent, the RBA has successively lifted the key cash rate target cent since May to 2.35 per cent.
Dr Lowe said the amount of homebuyers who took out fixed-rate loans soared to nearly 50 per cent after the RBA set the cash rate at a historic low of 0.1 per cent in November 2020.
The official interest rate, which guides mortgage and other loan rates set by lenders, remained at 0.1 per cent until May this year.
“People did respond sensibly in taking out fixed rate loans during that period. So they were prepared to go and buy a property or undertake other investments because they could get fixed rate money for three years,” Dr Lowe said.
“Our underlying message was the Reserve Bank would be standing with the community to do what was necessary to support the economy. We thought that when interest rates were going to stay low for a long period of time.”
RBA ‘NOT TO BLAME’ FOR HOUSING UNAFFORDABILITY
Dr Lowe has said the Reserve Bank’s interest rate decisions are not to blame for housing unaffordability in Australia.
He said “it’s the choices we’ve made as a society that have given us high housing prices” rather than interest rates “over a long period of time”.
“And the high housing prices come not from the high cost of construction, they come from the high cost of land embedded in each of our dwellings,” he said.
“And why do we have a high cost of land? Because of the choices we have made about taxation, the choices we’ve made about zoning and urban design.
“The fact that most of us have chosen to live in fantastic cities on the coast. And that we want a block of land. We don’t want to live in high density, and we’ve chosen as a society to underinvest in transport.
“So all of those things have either reduced the supply of well located land, and so we have high land prices embedded which gives us high housing prices. Interest rates have influenced the cycle, but not structurally.”
He said the central bank “can’t do anything about” these factors.
He said, speaking as an individual and “not a central bank governor”, he thought it would “be better if we had made different choices” to make houses cheaper and more readily available.
LOWE DIDN’T KNOW ABOUT MORRISON’S TREASURY GRAB
Dr Lowe has said he didn’t know he was meeting with “two treasurers” when he met with Scott Morrison and Josh Frydenberg on two occasions.
The committee noted Dr Lowe had met with the former prime minister and former treasurer on July 19 2021 and January 27 2022.
It came to light last month Mr Morrison had secretly appointed himself to five additional ministerial portfolios during the pandemic.
Mr Morrison’s power grab was done without the knowledge of most of those ministers, including Mr Frydenberg.
Mr Frydenberg was reportedly blindsided by the news Mr Morrison had given himself dual control of the Treasury Department in May 2021.
Dr Lowe was asked at the hearing on Friday whether it had been reported to him that the RBA had “two treasurers” until this year’s federal election.
“No, it was not. I was as surprised as the rest of the community,” he replied.
Dr Lowe said inflation should come back down towards 4 per cent by the close of 2023, after peaking at close to 8 per cent later this year.
“The global balance between demand and supply for goods is fixing up,” he said.
However, Dr Lowe said the RBA was forecasting inflation to remain above 3 per cent in two years’ time.
“And the longer it stays above 3 per cent, the more difficult it’s going to become,” he said.
“And if that happens, then we have higher interest rates and a recession, which is damaging.
“So we’ve got two difficult kind of positions at the moment: some pain now and hopefully real wages start rising again next year, against the risk of not doing anything, just sitting on our hands and having inflation stay higher.”
Dr Lowe said interest rates weren’t set in stone longer-term but they were likely to hover around a more “normal” level once inflation settled down.
“I think we’ll cycle around some number between 2.5 per cent and 3.5 per cent. It’s hard to be specific, and will cycle up and down with the economic cycle,” he said.
“So we’re closer now to that aren’t we? We’re 2.35 per cent so we’re getting to that range that you think is normal but probably still on the low side.”
He said interest rates only return to near-zero levels if Australia experienced another steep economic downturn such as the one it went through at the beginning of the pandemic.
‘UNEXPECTED THINGS DO HAPPEN’
Dr Lowe has said he doesn’t expect inflation and related interest rate rises to remain as high in 2023 but noted anything was possible.
He said he had heard “quite a lot of concern about the global economy” during his trip last week to Basel in Switzerland where he met with other central bank governors from around the world.
“So the supply sides fixing up, commodity prices are starting to come down. We’re raising interest rates and the global economy is looking a bit fragile,” he said.
“So those things will, I hope and expect, bring inflation down.”
However, he said “if that’s all wrong” and inflation stays high at around 6 or 7 per cent again in 2023, then “interest rates are going to have to be higher”.
“I don’t expect that to happen but unexpected things do happen,” he said.
RESERVE BANK CONCERNED ABOUT GLOBAL SLOWDOWN
Dr Lowe said the Reserve Bank was worried about the potential for a global economic slowdown and the ramifications this could have on Australia.
“One important source of uncertainty is the global economy, where the outlook has deteriorated. The situation in Europe is very troubling, not least because of the extraordinary increases in energy prices,” he said.
“In the United States, the Federal Reserve has indicated that monetary policy will need to become restrictive to lower inflation. The Chinese economy is also facing major challenges due to the combination of Covid, a severe drought and very weak conditions in the property sector.”
FURTHER INTEREST RATE HIKES CONFIRMED
Dr Lowe confirmed there would be further interest rate rises, but he said the size and pace of those increases were not set and would depend on broader economic conditions.
He said the central bank was “committed to returning inflation to the 2 to 3 per cent target range”.
Dr Lowe said the RBA would “do what is necessary to make sure that higher inflation does not become entrenched”.
However, he acknowledged the pressure interest rate rises were having on Australians.
“Higher interest rates are putting pressure on households, just at the time that higher petrol prices and grocery bills are squeezing budgets. So it is a difficult and a concerning time for some people,’’ he said.
“The alternative, though, of allowing higher inflation to become entrenched would be even more difficult and it would damage our economic prospects.”