The failure to address zoning, taxation and transport issues are to blame for systematically high housing costs, not interest rate settings, the Reserve Bank of Australia says.
RBA governor Philip Lowe said interest rates do drive cyclical changes in property prices but other forces were at play keeping house prices higher for longer.
"If you asked me what choices society has made to give us high housing prices, I'd say we have made them all - good or bad, but that's what we've done," he told a House of Representatives economics committee on Friday.
Dr Lowe said Australia's aversion to density and the underinvestment in transport had reduced the supply of well-located land and lifted demand for it.
"It's because of the choices we've made, the choices we've made about taxation, the choices we made about zoning and urban design, the fact that most of us have chosen to live in fantastic cities on the coast," he said.
He also said making mortgage finance easily available had also played a role.
Removing his hat as RBA governor, Dr Lowe said he would prefer Australia made different choices to lower the average price of housing.
"That would give people more opportunity and people would need to borrow less."
He also said unaffordable housing was feeding into intergenerational wealth inequality.
"Effectively, houses get passed from generation to generation, which is fine if you can access the 'Bank of Mum and Dad' and your parents can pass the house or income through to you.
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"But there are many Australians who are not in a position to do that."
Commenting on the cyclical dip in house prices, he forecast an overall drop of 10 per cent.
"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," he said.
However, he said dwelling prices had shot up 25 per cent over the past two years, so values would still be around 15 per cent higher than three years ago.
"It would not surprise me - and this is not a forecast - it would not surprise me if prices came down by a cumulative 10 per cent.
"And, even if they did that, they're still up 15 per cent over three years."
Dr Lowe also addressed the issue of soaring rents, arguing that interest rate hikes were not having a "first order" impact on rental prices.
"Some landlords have been saying that higher interest rates are going to lead to higher rents because they've got higher costs of financing and they're going to pass that through into rents in a tight rental market," he said.
"I don't think that's a first order effect on inflation."
In his opening speech before the parliamentary committee, Dr Lowe conceded a 'mistake' was made with previous inflation forecasts made in 2021.
A year ago, the RBA forecast inflation would be around 1.75 per cent in 2022. Forecasts now put inflation at 7.75 per cent.
He says many central banks around the world got it wrong because of unforeseen factors, such as the impact of the Ukraine-Russia conflict pushing crude oil prices higher.
He also added that the 2021 forecasts were "conditional" on certain economic conditions remaining stable.
"I'm frequently reminded that many people interpreted our previous communication as a promise or as a commitment that interest rates would not increase until 2024 - this was despite our statements on interest rates always being conditional on the state of the economy," he said.
Future cash rate decisions would depend on inflation expectations and how general inflation psychology evolved in Australia, he said.
The RBA is facing a separate independent review that will scrutinise everything from its core objectives to its communication skills.
The review, introduced by Treasurer Jim Chalmers, has been welcomed by shadow treasurer Angus Taylor, although he warned against distracting the central bank from its core mandate of controlling inflation.
Earlier this month, the RBA announced an interest rate rise for the fifth consecutive month, lifting the rate to a seven-year high of 2.35 per cent.
It is the fastest increase in interest rates since the 1990s and has added more than $600 a month to the average mortgage holder's monthly repayments.
