Australia’s chief central banker has denied low interest rates during the Covid pandemic led to huge house price increases – instead blaming a lack of supply.

Reserve Bank Governor Michele Bullock made the claim on Tuesday afternoon as the she announced the first official rate cut since November 2020.

‘The gist of the housing price problem comes down to a mismatch between supply and demand. I don’t think you can blame monetary policy on this,’ she said. 

‘If you want to fix housing prices, you’ve got to go to different policies.’

Rate cuts, however, enable banks to lend more to prospective borrowers, which has historically led to higher house prices. 

Lower interest rates also give prospective borrowers more leeway to bid up prices at auction, which during Covid saw house values soar by 30 per cent in a year.

Real estate data group CoreLogic is now forecasting a double-digit surge in Sydney and Melbourne house prices should the Reserve Bank of Australia cut interest rates three more times in 2025, as the Commonwealth Bank and Westpac are forecasting. 

The RBA cash rate was cut by 25 basis points on Tuesday to 4.1 per cent and three more cuts would take it back to 3.35 per cent. 

Australia’s chief central banker has denied interest rate cuts have historically led to huge house price increases (pictured is a Sydney auction)

In 2021, when Reserve Bank interest rates were at a record-low of 0.1 per cent, Sydney’s median house price surged by 29.6 per cent as Brisbane values soared by 30.4 per cent, CoreLogic data showed.

Even Melbourne, a weaker performer since the pandemic, was doing well with its house prices climbing by 17.9 per cent.  

More than a quarter or 28.9 per cent of borrowers owed their bank six times or more of what they earned in early 2022 when the banks were still offering fixed and variable mortgage rates starting with a ‘two’. 

The Australian Prudential Regulation Authority, the banking regulator, requires banks to assess a borrower’s ability to cope with three percentage point increase in variable mortgage rates.

But during the pandemic in 2020 and 2021, banks were only required to stress test a 2.5 percentage point increase in variable mortgage rates. 

This meant a lot more borrowers were taking on dangerous levels of debt that became a problem when the Reserve Bank raised interest rates 13 times in 2022 and 2023. 

House prices soared during Covid when Australia’s border was closed and more Australians wanted to live in a home with a backyard. 

Former Sunrise host David Koch, who is now Compare the Market’s economic director, warned lower interest rates would only push up house prices and do nothing to improve affordability.

Reserve Bank Governor Michele Bullock made the extraordinary claim on Tuesday afternoon as the she announced the first official rate cut since November 2020

Reserve Bank Governor Michele Bullock made the extraordinary claim on Tuesday afternoon as the she announced the first official rate cut since November 2020

‘Rather than helping people reach their property goals faster, they may just end up paying more as a result, as bigger deposits threaten to push up property prices,’ he told Daily Mail Australia.

An immigration surge since the border reopened has exposed Australia’s undersupply of housing.

In the year to September, 449,060 migrants arrived on a net basis, factoring in permanent and long-term arrivals and departures.

But during the same period, only 177,702 new homes were built, Australian Bureau of Statistics data showed. 

But with 2.5 people living in every home, on average, the gap between net migration and newly-completed homes stood at 4,805.

Ms Bullock suggested boosting the supply of housing wasn’t the Reserve Bank’s job.

‘The bottom line though on housing prices is it’s the interaction of supply and demand,’ she said.

‘So, we can’t just talk about interest rates, lower inflation, lowering interest rates increasing serviceability to add to demand because at the same time, we’ve had a longstanding problem with supply of housing in Australia.’

Australia’s average, full-time salary of $100,000 would only buy a $650,000 home with a 20 per cent mortgage deposit.

That would only buy a small apartment in Sydney where the median house price is approaching $1.5million and units typically cost almost $860,000. 

Only a dual-income couple earning more than $200,000 or an individual within the top 2.3 per cent of income earners could afford to even buy a typical Sydney house with a 20 per cent deposit. 

***
Read more at DailyMail.co.uk