Assistant Governor Sarah Hunter highlighted the slow pace of improvements in housing supply, despite some positive indicators. During a conference in Hobart, Hunter acknowledged that developers are beginning to recognize the robust underlying demand and may respond by increasing the housing supply.
However, she emphasized that this is in its early stages and government initiatives aimed at streamlining approval and building processes will take time to impact the market significantly. In the meantime, the pressure on rents and housing prices is expected to persist until these new supplies become available.
Hunter pointed out that current new dwelling approvals are insufficient, and many projects remain unviable. Consequently, residential construction activity is projected to stay relatively subdued in the short term. This indicates that any substantial relief in housing costs will be delayed.
On the demand side, Hunter noted adjustments that could help ease the housing shortage and high prices. One such adjustment is an increase in average household size, which would reduce the overall demand for housing without changing the population size.
However, the current situation remains challenging. Housing completions are lagging behind the surging demand, driven by record levels of immigration and demographic changes, such as an ageing population and smaller family sizes. The trend towards working from home and a preference for more space have also contributed to the reduction in average household size, which has fallen from about 2.8 in the mid-1980s to around 2.59 recently. This shift has significantly increased housing demand.
Hunter noted that reversing these demographic trends seems unlikely, suggesting that the recent reduction in household sizes may become a more permanent fixture in the housing market landscape. This ongoing trend underscores the need for a substantial increase in housing supply to meet demand.
Addressing concerns about the impact of interest rate rises on housing inflation, Hunter clarified that market conditions, particularly vacancy rates, are the primary drivers of rent increases. There is little evidence to suggest that higher interest rates directly cause rents to rise.
However, she acknowledged that elevated interest rates might be delaying new housing projects, exacerbating the supply shortage. Many construction projects rely on debt financing, and higher interest costs make these projects less attractive or viable, thus dampening the flow of new housing supply.
Hunter concluded by emphasizing the critical nature of the housing market in Australia’s economy, noting that suitable housing is fundamental to people’s quality of life. The current housing challenges underscore the importance of finding effective long-term solutions to ensure everyone has access to adequate housing.
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