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Housing shortage could fuel inflation

Staff Reporter 2 minute read

The lack of new housing in Australia coupled with an influx in migration is piling pressure on the nation’s economy.

HIA figures released this month show the downturn in building approvals to be the longest seen in 24 years. Moreover, with reporting house BIS Shrapnel forecasting the arrival of over 185,000 permanent overseas migrants between 2007/08 – the highest annual inflow on record – the pressure for an increase in building activity is growing.

“The provision of an adequate supply of housing is a key contributing factor to Australia’s long-term economic growth,” said Jason Anderson, a senior manager with BIS Shrapnel.

Anderson warned that the current rate of residential construction is substantially below the required demand – prompting the urgent need for a construction phase to safeguard the economy.

“The undersupply of housing is leading to acceleration in rents. As housing rentals are a component of the CPI (comprising 5.3 per cent of the index) this trend is putting upward pressure on inflation,” he said.

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Upward movement with the CPI index could spur another interest rate rise for 2007, but the need for a boost in residential construction may put the Reserve Bank between a rock and a hard place.

“The RBA is expected to raise the cash rate to quell demand for inflationary pressures stemming from strong growth in consumer spending and employment. An interest rate increase will have a counter-productive supply effect on housing and will actually add to inflationary pressure from the rental market,” said Anderson. 

Housing shortage could fuel inflation
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