Housing Supply Crisis in Australia: No Easy Solutions, Warns RBA Economist
Reserve Bank of Australia’s chief economist, Sarah Hunter, laid bare the stark challenges facing the Australian housing market in a comprehensive address to the Real Estate Institute of Australia in Hobart. With developers postponing projects amid soaring costs, the nation has seen dwelling approvals per capita plummet to their lowest in a decade. This dire shortage in housing supply, coupled with robust demand fueled by high migration rates and an increasing trend of working from home, is setting the stage for continued escalations in house prices and rent.
According to Dr. Hunter, the gap between demand and supply signifies that “Demand pressure, and so upward pressure on rents and prices, will remain until new supply comes online.” However, she cautioned that rectifying the current shortfall in new housing supply would be no small feat, given the sluggish pace of new dwelling approvals and viability concerns over numerous projects.
The construction industry is caught in a “perfect storm” of constraints that hinder its capacity to address the housing shortage effectively. Challenges have been mounting since the onset of the pandemic, which saw a significant upswing in the commencement of residential projects, further fueled by the Morrison government’s HomeBuilder program. This program generated a surge in home renovations and new builds, exacerbating the strain on the sector.
Dr. Hunter highlighted the acute scarcity of finishing trades as projects initiated during the pandemic edge towards completion. The resulting labour and material shortages have catapulted the cost of building a new home by 40% since 2019. Consequently, the economic viability of future projects has come into question, prompting some developers to delay or abandon their plans entirely.
While acknowledging the impact of high interest rates on construction activity, Dr. Hunter underscored the fundamental principle that housing construction volume is ultimately determined by the balance of demand and supply, not by monetary policy alone. High population growth and a prevailing preference for more spacious living arrangements are driving demand upwards. Dr. Hunter pointed out that a minor change in the average household size can significantly affect housing needs, highlighting the potential impact of long-term trends such as the ageing population and recent shifts like the increased desirability of home offices.
Despite these insights, Dr. Hunter emphasised that there is no immediate solution to the housing shortage crisis. Long-term strategies such as easing zoning and planning regulations could eventually stimulate housing supply by lowering the costs associated with approvals and land. Yet, as Australia grapples with these complex challenges, it becomes clear that addressing the housing market’s current woes will require a multifaceted approach and considerable time before any substantial improvement is observed.
