Housing shortage fuels inflation, poses challenges for Reserve Bank

Annual housing inflation has accelerated to 5.5 per cent over the year to June 2024, significantly outpacing the average inflation rate of 3.8 per cent, according to recent data.

Master Builders Australia chief economist Shane Garrett attributed this primarily to rental price growth of 7.1 per cent over the year, reflecting a severe shortage of rental properties.

Garrett said, “For owner occupiers, the price of new dwellings is 5.4 per cent up on a year ago. This is partly the result of labour shortages and other cost pressures in the new home building market.”

The data underscores the urgent need to boost housing supply to combat inflation. Garrett emphasized, “It’s further evidence that if we are to win the battle against inflation, we need to pull out all stops to build new homes.”

Recent building approvals data revealed that June 2024 was the worst month for higher density home building approvals since 2012, exacerbating the supply crisis.

Master Builders Australia CEO Denita Wawn highlighted multiple factors constraining housing supply, including workforce shortages, low productivity, lack of critical infrastructure, high taxes and charges, slow approval processes, and costly union Enterprise Bargaining Agreements.

Wawn stated, “Inflation will remain too high if we don’t get a circuit breaker from Government to facilitate the building of more homes for both owner-occupiers and renters.”

The ongoing housing shortage is putting pressure on the Reserve Bank of Australia to consider raising interest rates, which could lead to even higher rental inflation and further suppress building activity.

This situation presents a complex challenge for policymakers as they attempt to balance inflation control with the need to stimulate housing construction and alleviate rental market pressures.