Higher housing supply won’t kill price rise: RBA

Reserve Bank of Australia (RBA) assistant governor (economic) Luci Ellis appeared before the House of Representatives standing committee on tax and revenue on Tuesday (14 September), for its first hearing in its inquiry into housing affordability and supply.

The committee, chaired by Liberal MP Jason Falinski, recently kicked off the review, with an aim to examine the impact of tax and regulation on house pricing and supply in Australia.

During the 2021 financial year, Australian house prices had grown by 13.5 per cent, according to CoreLogic, while price growth in the country’s cities was ranked among the world’s fastest, with Canberra coming in at 17th place internationally, for its annual growth rate of 15.7 per cent.

More recently, Australian Bureau of Statistics data released on Tuesday showed residential property prices across the eight capital cities recorded the largest quarterly rise in the three months to June, increasing by 6.7 per cent.

The total value of Australia’s 10.7 million residential dwellings also recorded the largest quarterly rise on record, leaping by $596.4 million to $8.9 billion in the June quarter. More than $8.5 billion of the total was owned by households.

Reflecting on the current state of the market, Ms Ellis commented it would be hard to argue there is an undersupply of housing.

“There has been extensive increase in the number of apartments being built and given that, coming down the pipeline at the moment are the significant number of new dwellings that have been built under the auspices of the HomeBuilder program,” she said.

“…The growth rate of dwelling stock has for a number of years actually run ahead of population growth.”

However, she argued that while supply is a “major factor” and will dampen price increases to a certain extent, it is “not a panacea”.

“Supply does increase, but around the world, when demand goes up a lot, it’s demand for the… housing stock. And yes, you can reduce the amount that then results in an increase in house prices and you can get more quantity and a bit less of an increase in prices,” Ms Ellis said.

“But if you are increasing the entire household sector’s capacity to pay substantially, whether it’s through rising incomes or lower interest rates or easier lending standards, then supply will dampen the effect on prices but it won’t eliminate it.

“And so the question is just how responsive you want your supply sector to be and how you trade off the responsiveness of the building sector, with other realms of public policy that are important to you – for example, the safety or suitability of housing," she noted earlier.

According to Ms Ellis, consumers’ increasing income and capacity to pay larger mortgages have largely swayed the escalation of house prices, following a wave of disinflation and financial deregulation in the 1990s, when nominal mortgage interest rates fell.

Credit availability had surged after restrictions on the supply of mortgage loans were waived in the 1980s, while the RBA’s commitment to low inflation saw interest rates go down.

And when people are able to spend less on necessities and to service larger mortgages, that will “build up” prices,” Ms Ellis said.

“What we are seeing here is fundamentally a distributional issue. If housing prices are rising, it’s because someone can afford to pay those prices,” she said.

“But the issue is that not everybody can.”

She added there are questions about whether the housing being built is appropriate, noting an oversupply of apartments across the three major cities across the eastern seaboard as demand shifted toward detached housing during the pandemic.

Governments may want to consider if particular types of housing, such as apartments or larger detached houses, have been imposed on Australians who may be better served by other types of housing, Ms Ellis affirmed.

“Most of the housing that is available for people to occupy is already there, and so the nature of the housing stock changes relatively slowly,” she stated.

“When demand increases for example, because incomes increase or interest rates or people’s preferences change because they’ve just seen a pandemic – it’s very hard. It doesn’t matter how flexible your construction is, it doesn’t matter how flexible your construction sector is, it doesn’t matter how liberal your zoning laws are, your supply curves will always slope up and prices will rise in the face of an increase of demand.”

APRA chair Wayne Byres recently expressed concern around the movement of house prices in another parliamentary hearing, saying the regulator is “cautious of the current environment and the way it could play out”.

NAB chief executive Ross McEwan and Westpac CEO Peter King also told MPs housing affordability is stretched, with Mr McEwan stating he would have concerns if the price rise continued.

The Reserve Bank and APRA are working together to monitor the housing and mortgage markets, having discussed the tools they would use if lending standards were to deteriorate.

As of yet, there have been no signs of poor-quality lending, but Mr Byres told MPs on Friday that APRA has been concerned with a recent rise in high debt-to-income lending. The regulator has not yet triggered any action.

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