No quick fix to housing crisis: RBA

The Reserve Bank has warned there’s no quick fix for rising property and rental prices as soaring construction costs deter developers from delivering much-needed supply.

It comes as higher interest rates put pressure on the funding of new projects, with expectations for the first rate cut pushing further and further out despite optimistic new Treasury inflation forecasts.

Soaring material and labour costs are making residential developments less viable. Picture: Getty

Speaking at an event in Hobart on Thursday, RBA chief economist Sarah Hunter said house and rental prices would continue to rise for some time as a ‘perfect storm’ of challenges hold back construction.

“Having navigated through the temporary disruption created by the pandemic, the sector is now facing weaker demand – dwelling approvals per capita are sitting at decade-lows,” Ms Hunter said.

“In other words, some market participants have delayed projects or decided not to begin because of the relatively high cost of building when compared with the project’s returns.”

Even with higher property prices and rents, many projects are still not viable with building materials and labour costs having surged by nearly 40% since late 2019.

Another barrier is the increased cost of funding, with the official cash rate rising from 0.1% to a 13-year high of 4.35% in less than 18 months.

The cash rate has surged from 0.1% to 4.35% in less than 18 months. Picture: Getty

While acknowledging it’s not the only factor that influences whether building projects stack up, Ms Hunter said higher interest costs were dampening the flow of new housing supply given dwelling construction projects are funded by debt.

PropTrack director of economic research Cameron Kusher said shifting expectations around interest rates means that’s unlikely to change any time soon.

Just months ago, market pricing indicated the first rate cut was expected in September this year.

That’s now been pushed out to July 2025.

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

The latest Consumer Price Index (CPI) rose a stronger-than-expected 1% during the March quarter, taking the annual rate of inflation to 3.6%.

While down from the peak of 7.8%, inflation remains above the RBA’s 2-3% target band.

Government claims budget measures will lower inflation sooner

Under current forecasts, the RBA doesn’t see inflation falling back within that target band until the end of next year, but surprising new Treasury forecasts now anticipate inflation could fall much sooner as a result of this week’s budget.

Treasurer Jim Chalmers said measures such as a $300 power bill rebate and increased rent assistance would “directly reduce headline inflation,” taking it back within the RBA’s 2-3% 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.

But some economists are sceptical.

HSBC chief economist Paul Bloxham said that while the measures will ‘mechanically’ lower the cost of energy and rent – and therefore reduce inflation on these products – that’s likely to be offset as consumers spend the difference, and then some.

“While it may [lower inflation] mechanically for those components – rents and electricity prices – we expect the boost to household disposable incomes from these subsidies, and the substantial boost to disposable income from the personal income tax cuts, will see increased consumer spending, which will support underlying inflation, rather than lower it," Mr Bloxham said.

He said interest rate cuts were “not likely” this year, with stubborn inflation expected to deter the RBA from moving until at least the first quarter of next year, with a “tangible risk that it takes even longer for cuts to arrive”.

A $300 rebate for all Australian households will 'mechanically' lower energy prices, but economists are sceptical about the impact on total inflation. Picture: Getty

Mr Kusher said for many households, the energy rebate adds to similar measures announced by state governments such as Queensland, where households will receive a $1000 energy credit, and $400 in WA.

“While the rebate will lower energy costs and energy cost inflation, for a proportion of the households that receive these rebates, the $300 (or more) less they have to spend on electricity will mean they have $300 more to spend elsewhere,” Mr Kusher said.

“Certainly some households will choose to not spend the saving, but lower income households are likely to spend which is likely to lead to higher levels of inflation in other areas of spending.”

Market pricing implies an interest rate cut may not come until mid-next year, even after Tuesday's budget. Picture: Getty

Despite the updated inflation forecasts, economists and markets have not budged on when they see the first rate cut. Economists at the big four banks anticipate the first move will come in November this year, while financial markets anticipate mid-next year.

Mr Kusher said in his view, March or April next year was most likely.

“From a housing perspective I suspect a lot of owners and buyers were anticipating cuts this year and the pushing back on rate cuts could change the willingness of owners to sell – or it might necessitate them to sell – and the willingness of purchasers to buy.”

In the meantime, Ms Hunter said the supply-demand imbalance will continue to put pressure under rents and home prices.

"Demand pressure, and so upward pressure on rents and prices, will remain until new supply comes online," she said.

The federal government's housing target encourages state governments to streamline approvals. Picture: Getty

She said feedback from the RBA's business liaison program suggested the strength in underlying demand was encouraging some developers to respond with new supply, while federal and state government initiatives that streamline the approvals and building processes will also reduce costs, which will ultimately lift supply.

"But it will not be a quick fix," she said. "In the meantime, we expect residential construction activity to remain relatively subdued."