Australia Markets closed

The RBA is anticipating a housing shortage and another crazy price boom in markets that really don't need it

Jack Derwin
  • The Australian property market looks set for another crazy ride according to the Reserve Bank of Australia (RBA) which is forecasting another price boom.
  • The RBA expects construction activity, which is already surprisingly slow, to continue declining into next year, creating a supply shortfall, deputy governor Guy Debelle said in a speech on Thursday.
  • As demand returns to the market, there looks like there won't be enough stock to cater for it, leading to yet another price surge in the -- already expensive -- Sydney and Melbourne markets.

Here we go again.

Australia is headed towards yet another property supply shortage, and it could put a rocket under prices, the Reserve Bank of Australia (RBA) has warned.

"While the increase in supply has finally met the earlier increase in demand, demand will continue to grow given population growth but supply is going to decline. So there is quite likely to be a shortfall again in the foreseeable future," RBA deputy governor Guy Debelle told an investment conference in Sydney on Thursday.

For those not living under a rock, Debelle's words should trigger a serious sense of déjà vu. Those same conditions led to prices running away for years, pricing many out of the market entirely in Sydney and Melbourne. Prices in those cities shot up 75% and 58% respectively between 2012 and 2017.

For those who didn't own ten houses, and wanted to get into those markets, there's was then a palpable sense of relief as prices descended slightly from their lofty heights over the last 18 months.

Less so when a rebound began following the federal election, a reloosening of lending standards, and a series of rate cuts that brought the cost of borrowing down.

READ MORE: Sydney and Melbourne house prices have soared again, as the Australian property market surges by the most in two and a half years

Construction of residential property is already declining and the RBA forecasts a larger downturn ahead

All those levers have helped stir up demand, at the same time that construction activity cools, limiting the stock of new houses coming to market.

"The housing construction cycle in Australia clearly turned down at the end of last year. That brought to an end a long upswing at the national level that started in 2012," Debelle said.

"Since September 2018, residential construction activity has declined by 9 per cent. The decline has been broad-based across detached and higher-density housing, as well as spending on renovations."

The major problem with a dwindling new supply of housing is that it takes a long time to get it going again, particularly when it comes to the kind of high-density housing required in Sydney and Melbourne for example. That creates long lead times where momentum, both up and down, takes a while to build and a while to actually come to fruition.

READ MORE: Australia's construction downturn is getting worse

"Given the large size of the pipeline, we had expected construction activity to remain at a pretty high level for most of this year, but it turned down sooner and by more than we had expected," Debelle said. "Building approvals are around 40 per cent lower than their peak in late 2017."

"We are forecasting a further 7% decline in dwelling investment over the next year, and there is some risk the decline could be even larger," Debelle said, noting that 2020 could be the year construction bottoms.

Prices accordingly are expected to surge once again in major markets, with economic repercussions

With all that said, it leaves Debelle with a pretty clear view of where the property market is headed.

"The housing price cycle has also turned, but in the opposite way to the construction cycle," Debelle said. "The growth in demand without a meaningful supply response will lead to a larger price response."

In layman's terms, with slowing supply, and growing demand, the RBA's thinking is prices can really only go one way -- up.

Hold on to your hats, we could be in for another wild ride.