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

Reserve Bank boss makes an embarrassing maths blunder over Australian house prices – after hiking interest rates at the highest rate in three decades… and the bank’s reason why he couldn’t do the sum

  • Reserve Bank Governor Philip Lowe made mathematical error on home prices
  • He told parliamentary hearing prices were likely to fall by 10 per cent by 2023
  • Argued after 25 per cent rise since pandemic, they would be 15 per cent higher 
  • Simple arithmetic shows prices would be 12.5 per cent higher on a net basis
  • Reserve Bank spokeswoman said he was answering questions at a hearing 

The Reserve Bank of Australia boss has made an embarrassing mathematical error about house prices – as his staff defend 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 property prices to fall by 10 per cent by 2023. 

But Dr Lowe argued that prices would still be 15 per cent higher than before the pandemic – because house prices have surged by 25 per cent over two years.

But a simple mathematical calculation shows the Governor is incorrect. 

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The Reserve Bank of Australia chief made an embarrassing mathematical error when it came to predicting house prices. Governor Philip Lowe (pictured) told a parliamentary hearing on Friday he expected property prices to fall by 10 per cent in 2022, but argued they would still be 15 per cent higher than before the pandemic following a 25 per cent increase

The Reserve Bank of Australia chief made an embarrassing mathematical error when it came to predicting house prices. Governor Philip Lowe (pictured) told a parliamentary hearing on Friday he expected property prices to fall by 10 per cent in 2022, but argued they would still be 15 per cent higher than before the pandemic following a 25 per cent increase

What Dr Lowe told the parliamentary committee

‘It would not surprise me if prices came down by a cumulative 10 per cent,’ Dr Lowe said.

‘Even if they did that, they’re still up 15 per cent over three years, so it’s hard to know.

‘As interest rates rise further, and they will rise further, I’d expect more heat to come out of the housing market and prices to come down further.

‘We’ve got to remember prices went up 25 per cent in two years – people were complaining that housing prices were rising too quickly.’

Home values actually would be 12.5 per cent higher from where they were in early 2020 – not 15 per cent higher after an interest rate rise-induced downturn.

For example, a $1million house that rose in value by 25 per cent would be worth $1.25million. 

A 10 per cent drop from $1.25million would see prices fall back to $1.125million. 

This $1.125million finishing price after three years would be 12.5 per cent higher than the original $1million price – not 15 per cent higher.

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

‘It is worth pointing out that it was in response to a question and the Governor did not have a calculator to hand so he spoke in broad terms,’ she told Daily Mail Australia.

Dr Lowe has a PhD from the Massachusetts Institute of Technology and is on a total pay package of $1.076million.

Australia’s median house and unit price last month plunged by 1.6 per cent – the steepest decline since January 1983, CoreLogic data showed.

This took Australia’s mid point home price to $738,321.

The Commonwealth Bank, Australia’s biggest home lender, is predicting a 15 per cent fall over 2022 and 2023.

But a simple mathematical calculation shows home values would be 12.5 per cent higher from where they were in 2020, not 15 per cent higher (pictured are Melbourne houses)

But a simple mathematical calculation shows home values would be 12.5 per cent higher from where they were in 2020, not 15 per cent higher (pictured are Melbourne houses)

Gareth Aird, the bank’s head of Australian economics, in August predicted property prices would reach their lowest point in mid-2023, before gradually recovering in the second half of the year.

He is forecasting a 15 per cent drop from the peak in April 2022 to the trough in June 2023, with Reserve Bank rate cuts next year expected to spark a property market recovery as inflation pressures moderated.

Why Philip Lowe is wrong

The Reserve Bank of Australia governor told a parliamentary hearing property prices would fall by 10 per cent

But he argued they would still be up by 15 per cent after rising by 25 per cent over two years

A 10 per cent drop after a 25 per cent fall would mean a net gain of 12.5 per cent, not 15 per cent

A house that was worth $1million in 2020 that rose in value by 25 per cent would be worth $1.25million, but a 10 per cent drop from this level would take it to $1.125million

That would equate to a 12.5 per cent increase from the original $1million price 

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

The Commonwealth Bank is expecting capital city home prices to plunge by 8 per cent in 2022 and fall by 3 per cent in 2023 – with prices expected to fall in the first half of 2023 before recovering from July.

That would mean a $71,238 drop this year followed by a $24,577 decline next year, using CoreLogic’s December 2021 median combined capital city house price of $890,469 as a benchmark.

Sydney home prices were expected to fall by 14 per cent in 2022 but be flat next year, as part of an overall 18 per cent peak to trough decline.

The median house price in April was $1.417million so this 18 per cent slide would result in a $255,053 drop to $1.162million by mid-2023.

Melbourne was expected to suffer a peak to trough fall of 17 per cent, which would see the median house price fall by $170,157 to $830,769 by the middle of next year, from $1.001million in April 2022.

The Victoria capital was expected to suffer a 12 per cent fall in 2022 which would mean a $199,751 drop to $878,177 from the December 2021 level of $997,928.

Dr Lowe, who has PhD from the Massachusetts Institute of Technology and is on a total pay package of $1.076million, made so very basic arithmetic errors (pictured is a Melbourne auction)

Dr Lowe, who has PhD from the Massachusetts Institute of Technology and is on a total pay package of $1.076million, made so very basic arithmetic errors (pictured is a Melbourne auction)

An expected 2 per cent drop in 2023 would take the median price down to $860,613 by the end of the year.

House prices drop in almost EVERY capital city market in August

SYDNEY: Down 2.6 per cent to $1,302,635

MELBOURNE: Down 1.5 per cent to $948,879

BRISBANE: Down 2.1 per cent to $864,149

ADELAIDE: Down 0.2 per cent to $707,364

PERTH: Down 0.2 per cent to $588,308

HOBART: Down 1.7 per cent to $772,443

DARWIN: Up 1.1 per cent to $592,183

CANBERRA: Down 2 per cent to $1,033,377

Source: CoreLogic data for August based on median house prices

Treasurer Jim Chalmers in July launched a review into the Reserve Bank of Australia after Dr Lowe in 2021 repeatedly signalled the cash rate would stay on hold at a record-low of 0.1 per cent until 2024 ‘at the earliest’.

But since May, borrowers have copped five consecutive monthly increases, taking the cash rate to a seven-year high of 2.35 per cent. 

The 2.25 percentage points of increases have marked the steepest rise since 1994. 

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

‘Some people think that was a mistake and it may well have been,’ he said on Friday morning.

The RBA chief also admitted shortcomings with predicting inflation during the pandemic, but argued other central banks had made the same error.

‘Our forecasts have not been that good,’ he said.

‘Everyone has got this wrong and the Reserve Bank has got it wrong as well and when we make forecast errors of this magnitude, it’s incumbent upon us all to look back and ask what could we have done differently, what do we could learn from that.’

Dr Lowe said in future, he would refrain from being specific with a date when it came to making interest rate predictions, even if he was talking about existing economic circumstances during a ‘unique period in history’.

Dr Lowe on Friday told the House of Representatives Economics Committee in Canberra it was a mistake to make 'conditional' and 'explicit' forecasts about interest rates in 2020 and 2021, before Russia's Ukraine invasion pushed up crude oil prices

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

‘Our language about the timing will be vaguer as I’ve tried to be today,’ he said.

‘I’m frequently reminded that many people interpreted our previous communications as a promise or as a commitment that interest rates would not increase until 2024,’ he said.

‘This was despite our statements on interest rates always being conditional 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, up from 2.5 percentage points previously. 

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

‘The increase in the cash rate since May has been 225 basis points, and so this has had a much larger impact on maximum loan size than APRA’s requirement,’ he said.

‘Given this 225 basis point increase in the cash rate has been fully passed through to mortgage interest rates, it will have reduced borrowers’ maximum loan size by around 20 per cent.

‘So overall we know that higher interest rates will tend to depress residential and commercial property prices but there is considerable uncertainty about the magnitude and even the timing.’

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