Reserve Bank boss Philip Lowe in embarrassing maths blunder on Australian house prices

The Reserve Bank of Australia boss has made an embarrassing math mistake about house prices as his staff defends him by saying he didn’t have a calculator with him.

Governor Philip Lowe told a parliamentary hearing in Canberra on Friday that he expected real estate prices to fall 10 percent by 2023.

But dr. Lowe argued that prices would still be 15 percent higher than they were before the pandemic — as home prices have risen 25 percent in two years.

But a simple mathematical calculation shows that the governor is wrong.

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The head of the Reserve Bank of Australia made an embarrassing math error when predicting house prices. Governor Philip Lowe (pictured) told a parliamentary hearing on Friday that he expected real estate prices to fall 10 percent by 2022, but claimed they would still be 15 percent higher than before the pandemic after a 25 percent rise

What Dr. Lowe told the parliamentary committee?

“I wouldn’t be surprised if prices fell by a cumulative 10 percent,” said Dr. Lowe.

“Even if they did, they’re still up 15 percent three years from now, so it’s hard to know.

‘If interest rates continue to rise and rise further, I expect that more heat will come out of the housing market and that prices will fall further.

“We have to remember that prices have increased by 25 percent in two years – people complained that house prices were rising too quickly.”

In fact, home values ​​would be 12.5 percent higher than early 2020 – not 15 percent higher after a downturn driven by the interest rate hike.

For example, a $1 million home that has increased in value by 25 percent would be worth $1.25 million.

A 10 percent drop from $1.25 million would push prices back to $1.125 million.

This final price of $1.125 million after three years would be 12.5 percent higher than the original price of $1 million — not 15 percent higher.

A spokeswoman for the Reserve Bank defended Dr. Lowe, arguing that he made his comments before a parliamentary hearing without the benefit of having time to make calculations.

“It’s worth pointing out that it was an answer to a question and the governor didn’t have a calculator handy so he spoke in general terms,” ​​she told the Daily Mail Australia.

dr. Lowe has a PhD from the Massachusetts Institute of Technology and has a total pay package of $1,076 million.

Australia’s average home and unit price fell 1.6 percent last month — the sharpest drop since January 1983, CoreLogic data showed.

This brought the average price of a house in Australia to $738,321.

The Commonwealth Bank, Australia’s largest mortgage lender, forecasts a 15 percent decline in 2022 and 2023.

But a simple math calculation shows that home values ​​would be 12.5 percent higher than in 2020, not 15 percent higher (pictured are Melbourne homes)

Gareth Aird, the bank’s head of Australian economics, predicted in August that property prices would bottom out in mid-2023, before gradually recovering in the second half of the year.

He predicts a 15 percent drop from the peak in April 2022 to the trough in June 2023, with the Reserve Bank’s rate cuts expected to lead to a recovery in the real estate market next year as inflationary pressures ease.

Why Philip Lowe is wrong

The governor of the Reserve Bank of Australia told a parliamentary hearing that property prices would fall by 10 percent

But he claimed they would still be up 15 percent after a 25 percent increase in two years

A 10 percent drop after a 25 percent drop would mean a net profit of 12.5 percent, not 15 percent

A home that was worth $1 million in 2020 and increased 25 percent in value would be worth $1.25 million, but a 10 percent drop from this level would take it to $1.125 million

That would equate to a 12.5 percent increase over the original $1 million price

Should that prediction come true, the average house price in Australia’s capital will have fallen $141,038 to $799,215, from $940,255 in April, before interest rates rose in May for the first time since November 2010.

The Commonwealth Bank expects house prices in the capital to fall by 8 percent in 2022 and fall by 3 percent in 2023 – with prices expected to fall in the first half of 2023 before recovering from July.

That would mean a drop of $71,238 this year, followed by a drop of $24,577 next year, benchmarking CoreLogic’s average combined metropolitan home price of $890,469 in December 2021.

House prices in Sydney were expected to fall 14 percent in 2022, but remain flat next year, as part of an overall 18 percent drop from peak to depth.

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The median home price in April was $1,417 million, so this 18 percent drop would result in a drop from $255,053 to $1,162 million by mid-2023.

Melbourne was expected to experience a peak-to-trough drop of 17 percent, pushing the median home price down $170,157 to $830,769 by the middle of next year, from $1,001 million in April 2022.

The capital of Victoria was expected to see a 12 percent decline in 2022, which would mean a drop of $199,751 to $878,177 from its December 2021 level of $997,928.

dr. Lowe, who has a PhD from the Massachusetts Institute of Technology and has a total pay package of $1,076 million, made very basic calculation errors (pictured is an auction in Melbourne)

A projected 2 percent decline in 2023 would push the median price down to $860,613 by the end of the year.

House prices fall in almost EVERY capital in August

SYDNEY: 2.6 percent down to $1,302,635

MELBOURNE: down 1.5 percent to $948,879

BRISBANE: 2.1 percent down to $864,149

ADELAIDE: 0.2 percent down to $707.364

PERTH: 0.2 percent down to $588,308

HOBART: Down 1.7 percent to $772,443

DARWIN: 1.1 percent up to $592,183

CANBERRAE: Down 2 percent to $1,033,377

Source: CoreLogic August data based on median home prices

Treasurer Jim Chalmers launched an investigation into the Reserve Bank of Australia in July after Dr. Lowe had repeatedly indicated in 2021 that spot interest rates would remain at a record low of 0.1 percent until 2024 “at the earliest.”

But since May, borrowers have endured five consecutive monthly hikes, pushing the cash interest rate to its seven-year high of 2.35 percent.

The increases of 2.25 percentage points are the strongest increase since 1994.

dr. Lowe told the Economic Committee of the House of Representatives in Canberra on Friday that it was a mistake to make “conditional” and “explicit” forecasts about interest rates in 2020 and 2021, before Russia’s invasion of Ukraine pushed crude oil prices up. .

“Some people think that was a mistake and it could very well be,” he said Friday morning.

The RBA chief also admitted flaws in forecasting inflation during the pandemic, but argued that other central banks had made the same mistake.

“Our predictions have not been so good,” he said.

“Everyone is wrong about this and the Reserve Bank is wrong too and when we make prediction errors of this magnitude it is up to all of us to look back and ask what we could have done differently, what can we learn from that.”

dr. Lowe said he wouldn’t be specific with a date in the future when it came to making interest rate predictions, even talking about existing economic conditions during a “unique period in history.”

dr. Lowe told the Economic Committee of the House of Representatives in Canberra on Friday that it was a mistake to make “conditional” and “explicit” forecasts about interest rates in 2020 and 2021, before Russia’s invasion of Ukraine pushed crude oil prices up. .

“Our language about the timing will be vaguer than I’ve tried to be today,” he said.

“I am often reminded that many people interpreted our earlier communication as a promise or a commitment that interest rates would not rise until 2024,” he said.

‘This is despite the fact that our statements about interest rates have always depended on the state of the economy.’

Since November, the Australian Prudential Regulation Authority has required borrowers to model a borrower’s ability to cope with a three percentage point rise in variable mortgage rates, from 2.5 percentage points previously.

But Jonathan Kearns, the Reserve Bank’s head of domestic markets, told the Australian Financial Review Property Summit on Monday that the 2.25 percentage point rate hikes since May had done more to slow the property market than the banking regulator’s stricter rules.

“The cash interest rate hike since May has been 225 basis points, so this has had a much greater impact on loan caps than APRA’s requirement,” he said.

“Given that this 225 basis point increase in the cash interest rate has been fully passed on in the mortgage rate, the maximum amount of borrowers will be reduced by about 20 percent.

“So in general we know that higher interest rates tend to depress residential and commercial real estate prices, but there is significant uncertainty about the magnitude and even the timing.”

Jacky

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