Australia is grappling with a housing supply crisis that is not only pushing up rents and new home prices but also potentially keeping inflation and interest rates higher for longer. As the nation faces rising costs in the housing sector, the broader economic implications are becoming increasingly concerning.
Housing’s Impact on Inflation
The latest figures from the Australian Bureau of Statistics (ABS) reveal that the Consumer Price Index (CPI) rose by 1% in the June quarter and 3.8% over the past year. While this was slightly below expectations and aligned with the Reserve Bank of Australia’s (RBA) forecasts, there remains a significant concern: housing-related inflation.
Housing inflation grew by 1.1% during the June quarter and 5.2% over the year to June, far exceeding the average annual inflation rate of 3.8%. This spike was driven by a 7.3% increase in rents and a 5.1% rise in the prices of new homes purchased by owner-occupiers. The persistent rise in housing costs underscores the difficulty in containing inflation, even as the broader economy shows signs of stabilizing.
The Role of the Housing Shortage
Master Builders Australia chief executive Denita Wawn emphasizes that without a concerted effort from the government to increase the housing supply, inflation is unlikely to return to acceptable levels. The current housing shortage is creating a vicious cycle: as the supply of homes remains constrained, rents and home prices continue to rise, adding pressure on the RBA to raise interest rates. Higher interest rates, in turn, can further suppress building activity, exacerbating the shortage.
RBA’s Perspective on Housing Inflation
While housing inflation is a critical factor, it is not the sole focus for the RBA when setting interest rates. According to PropTrack senior economist Paul Ryan, the RBA is aware that housing inflation largely reflects past market conditions. Current interest rate changes will have limited immediate impact on rents, as these are influenced by advertised rents that have already been adjusted in response to market dynamics.
The Rental Market: Signs of Improvement?
Australia’s rental market has been under significant strain, with rapid rent increases and low vacancy rates becoming the norm in recent years. However, recent data suggests a slight easing of these conditions. National weekly rents remained steady during the June quarter, with a year-on-year increase of 9.1% to $600 per week. At the same time, the national vacancy rate edged up to 1.4%, from 1.1% in the March quarter.
This marginal improvement can be attributed to a resurgence in property investor activity, which is helping to increase the supply of rental homes. The ABS reports a 24% increase in new loan commitments to investors in the first five months of 2024 compared to the same period last year. While the market remains challenging for renters, these developments may signal the beginning of a shift toward more balanced conditions.
Challenges in New Home Construction
Despite the positive signs in the rental market, new home construction remains a significant challenge. Building approvals fell by 8.5% nationally during the year to June, marking the slowest financial year for approvals in a decade. This slowdown poses a significant obstacle to meeting the federal government’s ambitious target of constructing 1.2 million new homes by mid-2029.
Although the return of property investors could eventually support a rebound in housing construction, the current data paints a grim picture. With just 162,892 dwellings approved in the 2023-24 financial year, the goal of building 240,000 homes annually to reach the 1.2 million target seems increasingly out of reach.
Conclusion
Australia’s housing shortage is a complex issue that is having a profound impact on inflation and economic stability. While there are some signs of improvement in the rental market, the broader challenges of housing affordability and supply persist. Without significant intervention to increase the housing stock, the pressure on inflation and interest rates is likely to continue, posing ongoing challenges for both policymakers and Australians seeking affordable housing.
