The RBA says booming house prices are just a question of supply and demand
When it comes to house prices, you can have too much of a good thing.
That’s the view at Martin Place. The RBA will have to be watching the strong gains in house prices with a nervous eye.
House prices continue to defy the nay-sayers. Property prices have now lifted for 14 straight months since they bottomed out and posted a pretty solid gain of 0.6% in March.
If anything, house prices seem to be accelerating.
This creates a little bit of a headache for the RBA. There’s something called the wealth effect. When people see their houses rise in value, they tend to draw down some of that to boost consumption.
But consumption still needs to slow further. The inflation rate is still above target, the unemployment rate is very low, and on all the metrics that count, the economy is still running too hot.
But the RBA is also keen to point out that the current boom in house prices isn’t their fault.
It simply comes down to supply and demand.
“On the demand side, population growth remained high and the shift in preferences for more housing space that occurred during the pandemic was yet to unwind, despite worsening affordability,” they said after the last board meeting.
“On the supply side, new housing had been constrained by ongoing capacity constraints – particularly for finishing trades and where the required skills were easily transferable to non-residential construction – and rapid increases in construction costs.”
The point about household size is an interesting one. Take a look at the chart:
There’s been a steady downward trend in people per dwelling for decades now. What that means is that for a given population, we need more houses.
But you can see that during Covid, in the capitals (red line), there was a sharp tick down in the number of people per household – and I think a lot of that had to do with the need for home offices.
What’s interesting though is that even though the pandemic has passed, that figure hasn’t bounced back.
We’re still spreading ourselves out.
Which means that we simply need more houses.
And I don’t know if you’ve heard, but we don’t have more houses. We don’t have enough houses right now.
And as the RBA points out, there are all sorts of problems involved with bringing more houses online.
Housing approvals are at the lowest level in a decade.
So we need more dwellings to house the existing population, just as the population is growing quickly through immigration, and just as dwelling construction is tanking.
That’s the reality when it comes to supply and demand.
And it’s not the RBA’s fault.
JG.
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