RBA governor 'not surprised' if property prices drop 10 per cent

Reserve Bank of Australia (RBA) Governor Philip Lowe stepped out of his comfort zone to offer an opinion on property prices and his projection was not as dramatic as that made by many economists and commentators.

He said he would “not be surprised” if national real estate values tumbled by 10 per cent, while also saying the pace of interest rate hikes was about to slow.

“It’s hard to forecast asset prices and prices went up 25 per cent over the past two years – a very, very big increase,” Mr Lowe said.

“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.”

Speaking to a parliamentary economics committee in Canberra on Friday (16 September), Mr Lowe acknowledged that many Australian households were straining under the weight of higher interest rates and inflation that was far outpacing any wage increases.

“I know higher interest rates are unwelcome for many people, especially those who have borrowed large sums over recent times,” he said.

“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.

“The alternative, though, of allowing higher inflation to become entrenched would be even more difficult and it would damage our economic prospects.”

“The increase in interest rates has been rapid and global and we know monetary policy operates with a lag.

“At some point, it will be appropriate to slow the rate of increase in interest rates and the case for doing that becomes stronger as the level of interest rates increases.”

Median house prices - how far could they fall by the end of 2023?

Source: RateCity.com.au. ANZ property price forecasts, CoreLogic index-adjusted median values, 31 December 2021 and 31 July 2022.

Australia’s current inflation rate is 6.1 per cent, and the current cash rate target is 2.35 per cent, having been lifted by five consecutive hikes since May.

With the exception of the first hike of 0.25 per cent in May, all of those increases were by 50 basis points (or 0.5 per cent).

Mr Lowe repeated recent statements hinting that the pace of interest rate increases would soon slow from 0.5 of a percentage point each month, emphasising the cash rate had further to rise from the current level.

“At 2.35 per cent, I think the rate is still too low,” Mr Lowe told the House of Representatives Standing Committee on Economics.

Property price forecasts

While Mr Lowe stressed his own crystal ball gazing into property prices was not “a forecast” they are relatively optimistic compared to other projections.

ANZ on Friday released an upgraded forecast that predicted prices nationally would fall another 8 per cent this year alone, with an additional slide of 9 per cent in 2023, well beyond the 10 per cent expectation from the RBA governor.

The national median house price could drop by $150,518 by the end of next year, according to RateCity.com.au analysis of ANZ’s new property price forecasts.

Sydney (-14 per cent in 2022 and -6 per cent in 2023) and Melbourne (-11 per cent, -6 per cent) bore the brunt of the expected damage to home values.

But no capital city was expected to escape unscathed.

Adelaide, Darwin and Perth have been the recent poster children of Australian property but after a steady 2023, each is tipped to fall sharply.

Adelaide is expected to crash back to earth with a fall of 17 per cent in 2023, while Darwin and Perth could each retreat 12 per cent.

Among the biggest three capitals, values of falls were in the hundreds of thousands of dollars.

Sydney’s median house price is set to fall an estimated $204,543 between July 2022 and the end of 2023, taking it to $1,141,650.

In Melbourne, the median house price could fall by $128,141 from July 2022 to the end of 2023 to $836,809, while prices could drop by more than $160,000 in Brisbane by the end of next year.

‘Not to blame’

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 but would remain above 3 per cent for a couple more years.

Justifying the RBA’s position on rates now and his erroneous prediction that rates wouldn’t rise until 2023, Mr Lowe said inflation being driven by strong demand is, in part, a result of the policy approach during the pandemic.

“During 2020 and 2021, both fiscal and monetary policy provided very considerable economic support to households and businesses.

“At the RBA, we did this to provide a financial bridge to the day when the virus was contained and to provide some insurance against the possibility of very bad economic outcomes.

“As we sit here in Canberra today, it can be easy to forget how dire the outlook was in 2020: there were credible projections that the unemployment rate would reach 15 per cent, spending was collapsing, our hospitals were expected to be overflowing and a vaccine seemed years away.

“It was a scary time, and in that environment, the Reserve Bank Board wanted to do what it could to help and to shore up confidence (and) provide some economic insurance against the worst possible outcomes.

He also insisted that housing affordability issues were not the fault of the RBA and that factors at the root of the issue were not those controlled by the RBA.

“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 told committee attendees.

“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 that gives us high housing prices.

“Interest rates have influenced the cycle, but not structurally,” Mr Lowe said.