We're not building enough - so rents are rising

Posted on 6/12/2007  
New governments inherit all sorts of ongoing issues over which they appear to have little control - like housing demand driven by high overseas migration. Economic forecaster BIS Shrapnel says demand is driving Australia's housing needs ahead of actual new dwelling starts by about 31,000 houses.

BIS Shrapnel's research attributes the expansion in housing needs to net overseas migration scaling new heights. Migration numbers are expected to reach 185,000 people in 2007-08 - the highest annual inflow on record.

BIS Shrapnel says 151,000 new houses were started in 2006-07, while demand is now at a record high of 182,000 new dwellings per annum. The researchers forecast the same level of new home construction in 2007-08, which they say will lead to a deficiency of 100,000 dwellings by June 2008.

We just aren't building enough houses, or building them fast enough, to keep up. There is a significant gap between new housing and demand in both New South Wales and Victoria. New supply has been on the wane in Victoria for the past five years. Housing starts were down 2%, to 38,500 dwellings in 2006-2007, with demand estimated at 46,000 dwellings. In NSW, new housing starts are 20,000 dwellings behind existing demand.

The picture is a little different In Queensland, although supply remains below demand. An extended rise in housing rentals (average annual growth of 6% per annum for the three years to June 2007), contributed to a recovery in new dwelling starts (up 8% to 40,800 in 2006-07).

This undersupply of housing is at the core of the country's accelerating rents and (as housing rentals are a component of the Consumer Price Index) is putting upward pressure on inflation (and interest rates). National average rentals increased by 3% in the year to June 2006 and picked up 5.2% in the year to June 2007.

BIS Shrapnel's senior manager Jason Anderson said in late October that a further rate rise could stifle the recovery in dwelling starts in 2008. As he correctly forecast, the Reserve Bank did raise rates in November. While the new Labor Government will be hugely relieved that the Reserve Bank will hold interest rates at 6.75% until at least February 2008, rising interest rates are not helping to encourage investors to fund new housing to meet future demand.

It's not all bad news, though. BIS Shrapnel believes the sustained rise in housing rentals will be a factor in a housing construction recovery in 2009.


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