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Construction lag to accelerate property price growth

Residential construction activity is to remain subdued over the coming year, according to the RBA, placing upward pressure on home values.

In an address to the CFA Societies Australia Investments Conference, deputy governor of the Reserve Bank of Australia (RBA) Guy Debelle noted that a “sizeable downturn” is underway in the residential construction sector, brought about by the fall in demand for housing over the past 18 months.   

Mr Debelle said he expects construction activity to remain subdued in the medium term but would slowly improve as the rebound in the broader housing market filters through to the sector.

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“2020 looks like being the low year for the residential construction sector. But we can see through the trough to the other side,” he added.

“Demand is still continuing to increase, given population growth. While there are pockets of oversupply, particularly in parts of Sydney where the vacancy rate is high, they are not widespread.

“Prices have turned in Melbourne and Sydney (though not Perth or Darwin), which probably brings the investor back into the market.”

However, Mr Debelle said the lag in construction activity, compounded by tighter lending conditions, would further accelerate property price growth, particularly in the apartment sector.

“The long lead times on higher-density construction mean the supply response is likely to be slow. The tight conditions on lending to developers may mean it is even more protracted,” he added.

“The growth in demand without a meaningful supply response will lead to a larger price response.”

According to Mr Debelle, the acceleration in property price growth would not pose an immediate threat to financial stability if it is “not accompanied by a material expansion in borrowing”.

Mr Debelle claimed that if stability risks arise, monetary policy would not be “well placed” to address them.

“Monetary policy is concerned about aggregate outcomes for inflation and unemployment,” he said.

The RBA deputy governor said the central bank would continue to pursue its target of full employment and stronger inflation growth.

“Unemployment is a little higher than it was at the beginning of the year, and there has not been much upward pressure on wages,” he said.

“In turn, this has contributed to the extended run of inflation outcomes below the medium-term target range.

“As a result, the board has decided to ease monetary policy in recent months. These actions take account of the expected evolution of the housing [cycle].

“With these actions, we are seeking to make more assured progress towards both full employment and the inflation target.”

[Related: RBA granted short-term breathing space in march to QE]

Construction lag to accelerate property price growth
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Charbel Kadib

Charbel Kadib is the news editor on the mortgages titles at Momentum Media.

Before joining the team in 2017, Charbel held roles with public relations agency Fifty Acres, and the Department of Communications and the Arts.

You can email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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