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Former treasurer Peter Costello blames Reserve Bank of Australia for house price rises

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Australia’s longest-serving treasurer has blamed the Reserve Bank for the extraordinary surge in house prices across the country.

Peter Costello, who held the senior ministerial post from 1996 to 2007, was scathing of the central bank’s decision to cut the cash rate to a record low of 0.1 per cent and then promise to leave it there until 2024.

‘The Reserve Bank got it wrong,’ he told the ABC’s 7.30 program. 

‘It said that it could hold the three-year rate at 0.1 per cent out to 2024. It couldn’t.

‘It was an irresponsible statement to make.’

Reserve Bank of Australia Governor Philip Lowe had, until recent months, promised to leave the cash rate on hold until 2024 ‘at the earliest’.

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Australia's longest-serving treasurer has blamed the Reserve Bank for the ridiculous surge in house prices (pictured is a new home owner in Sydney)

Australia’s longest-serving treasurer has blamed the Reserve Bank for the ridiculous surge in house prices (pictured is a new home owner in Sydney)

Dr Lowe has since indicated interest rates could rise in 2023 but he ruled out raising the cash rate to cool an overheating housing market.

‘Finally, I would like to address the question of housing prices, as some analysts have suggested we might lift the cash rate to cool the property market,’ he said in September.

‘I want to be clear that this is not on our agenda.

‘While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth.’

Mr Costello, once mooted as a potential prime minister, said those promises encouraged more people to buy a home and get a fixed mortgage rate.

‘I suppose they were saying to people, ‘Try and get a fixed mortgage because we can hold the rates out to 2024′,’ he said.

‘They now admit they can’t and in fact, it would be irresponsible of them to try if inflation took off.

‘The Reserve Bank can’t give you cast iron guidance for three years and you’d be foolish to take it.’

Peter Costello, who held the senior ministerial post from 1996 to 2007, was scathing of its decision to cut the cash rate to a record low of 0.1 per cent and then promise to leave it there until 2024

Peter Costello, who held the senior ministerial post from 1996 to 2007, was scathing of its decision to cut the cash rate to a record low of 0.1 per cent and then promise to leave it there until 2024

In the year to October, Sydney’s median house prices has surged by 30.4 per cent to $1.334million as wages grew by just 2.2 per cent, CoreLogic data showed.

Reserve Bank of Australia Governor Philip Lowe had, until recent months, promised to leave the cash rate on hold until 2024 'at the earliest'

Reserve Bank of Australia Governor Philip Lowe had, until recent months, promised to leave the cash rate on hold until 2024 ‘at the earliest’

The Commonwealth Bank, Australia’s biggest home lender, is forecasting double-digit plunges in Sydney, Melbourne, Canberra and Hobart in 2023, following strong gains since the end of 2020. 

Gareth Aird, the bank’s head of Australian economics, is predicting interest rates will now be raised in November 2022, marking the first cash rate increase in 12 years.

‘The Australian housing market is in the twilight of an incredible boom that has been fuelled by record low mortgage rates,’ he said.

Mr Aird is now predicting the Reserve Bank will raise the cash rate to 1.25 per cent by the September 2023, a level unseen since mid-2019, which ‘lies at the heart of our expectation that home prices will contract’. 

Should that prediction materialise, the RBA would be raising rates five times, on each occasion by 0.25 percentage points judging by previous moves.

Westpac senior economist Matthew Hassan said quality issues with recently-built apartments had also seen buyers choose houses in Australia's biggest cities (pictured is a faulty apartment in Sydney)

Westpac senior economist Matthew Hassan said quality issues with recently-built apartments had also seen buyers choose houses in Australia’s biggest cities (pictured is a faulty apartment in Sydney)

The Commonwealth Bank is expecting Sydney property prices to climb by 27 per cent in 2021, before slowing to 6 per cent in 2022 and plunging by 12 per cent in 2023.

Commonwealth Bank predictions for home prices

SYDNEY: 2021 (Up 27 per cent); 2022:  (Up 6 per cent); 2023 (Down 12 per cent)

MELBOURNE: 2021 (Up 17 per cent); 2022 (Up 8 per cent); 2023 (Down 10 per cent)

CANBERRA: 2021 (Up 26 per cent); 2022 (Up 7 per cent); 2023 (Down 10 per cent) 

BRISBANE: 2021 (Up 26 per cent);  2022 (Up 9 per cent); 2023 (Down 8 per cent)

ADELAIDE: 2021 (Up 22 per cent);  2022 (Up 6 per cent); 2023 (Down 8 per cent)

PERTH: 2021  (Up 13 per cent); 2022 (Up 3 per cent); 2023 (Down 9 per cent)

HOBART: 2021 (Up 29 per cent); 2022 (Up 5 per cent); 2023 (Down 12 per cent)

DARWIN: 2021 (Up 17 per cent); 2022 (Up 7 per cent); 2023 (Down 8 per cent)

Source: Commonwealth Bank of Australia forecasts for dwellings or houses and units together

Westpac, Australia’s second biggest bank, is also expecting house and apartment prices to plunge in 2023.

Senior economist Matthew Hassan said Australia’s said the absence of migrants since March 2020 could also create oversupply issues.

‘Currently, the potential risk around oversupply comes from the combination of high levels of new building and an extended period of slow population growth due to closed borders,’ he said. 

Mr Hassan said quality issues with recently-built apartments had also seen buyers choose houses in Australia’s biggest cities.

‘A second, and partly related issue, is around building quality concerns,’ he said.

‘Flammable cladding and defects have been significant issues in the Sydney and Melbourne apartment markets. 

‘A ‘flight to quality’ is evident in the relative prices of units versus houses in Sydney’s outer areas and in Melbourne’s inner city.’ 

Australia’s headline inflation rate of three per cent, in the year to September, is also at the top of the Reserve Bank’s two to three per cent target band.

The consumer price index is only half that of the United States, where annual inflation in October stood at 6.2 per cent – the highest since 1990.

But Mr Hassan said Australia could soon be battling higher inflation, which would lead to higher interest rates.

‘A surge in inflation in the major developed economies abroad is raising concerns that the world and Australia may be facing into another one of these battles,’ he said.

‘To paraphrase the RBA Governor from a speech on Nov 16: ‘concerns about inflation have moved to the centre of many people’s radar screens’.’

Wages growth of just 2.2 per cent in the year to September is, for now, containing inflation in Australia. 

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