The Reserve Bank of Australia (RBA) has cautioned that there is no immediate solution to the escalating housing crisis.

Rising property and rental prices are exacerbated by soaring construction costs, which are deterring developers from supplying the much-needed housing.

Construction Costs and Interest Rates

Higher interest rates are also putting pressure on the funding of new projects. Optimistic new Treasury inflation forecasts have pushed expectations for the first rate cut further into the future. At an event in Hobart, RBA chief economist Sarah Hunter stated that house and rental prices would continue to rise due to a “perfect storm” of challenges affecting construction.

“After navigating the temporary disruption caused by the pandemic, the sector is now facing weaker demand. Dwelling approvals per capita are at decade-lows,” Ms. Hunter said. “Some market participants have delayed projects or decided not to start due to the high cost of building compared to the project’s returns.”

Challenges in Construction

Despite higher property prices and rents, many projects are still not viable. Building materials and labor costs have surged by nearly 40% since late 2019. Additionally, the official cash rate has increased from 0.1% to a 13-year high of 4.35% in less than 18 months, further increasing the cost of funding.

Ms. Hunter explained that higher interest costs are dampening the flow of new housing supply, as dwelling construction projects are funded by debt.

Shifting Expectations Around Interest Rates

Cameron Kusher, PropTrack director of economic research, said that changing expectations around interest rates mean that the situation is unlikely to improve soon. Just months ago, the first rate cut was expected in September this year, but it has now been pushed out to July 2025.

“With quarterly inflation stronger than anticipated, coupled with tax cuts from mid-year, it is unlikely that interest rate cuts will occur this year and have likely been pushed to 2025,” Mr. Kusher stated.

Inflation and Government Measures

The latest Consumer Price Index (CPI) rose by a stronger-than-expected 1% during the March quarter, taking the annual rate of inflation to 3.6%. While this is down from the peak of 7.8%, inflation remains above the RBA’s 2-3% target band. The government claims that budget measures will lower inflation sooner. Treasurer Jim Chalmers said that measures such as a $300 power bill rebate and increased rent assistance would “directly reduce headline inflation,” potentially bringing it back within the RBA’s target range by Christmas.

“While the outlook is uncertain, Treasury’s forecasts make it clear that our policies could see inflation return to target earlier, perhaps even by the end of the year,” Dr. Chalmers said.

Economist Reactions

However, some economists are skeptical. HSBC chief economist Paul Bloxham noted that while the measures will lower the cost of energy and rent mechanically, the boost to household disposable incomes from these subsidies and personal income tax cuts will likely result in increased consumer spending, supporting underlying inflation rather than lowering it.

Interest rate cuts are “not likely” this year, with stubborn inflation expected to deter the RBA from moving until at least the first quarter of next year. Mr. Kusher said that for many households, the energy rebate adds to similar measures announced by state governments, such as the $1000 energy credit in Queensland and $400 in Western Australia.

Housing Market Implications

From a housing perspective, the delay in rate cuts could affect the willingness of owners to sell and buyers to purchase. In the meantime, the supply-demand imbalance will continue to put pressure on rents and home prices.

“Demand pressure, and so upward pressure on rents and prices, will remain until new supply comes online,” Ms. Hunter said. Feedback from the RBA’s business liaison program suggests that the strength of underlying demand is encouraging some developers to respond with new supply. Federal and state government initiatives that streamline approvals and building processes will also help reduce costs and ultimately lift supply.

“But it will not be a quick fix,” Ms. Hunter warned. “We expect residential construction activity to remain relatively subdued in the meantime.”

The Information is Collected from The Business Times and The Star