Housing Warning

That's not a new warning from the central bank, but the time is approaching when it will stop being 'nice' and bash the housing sector with a brutal rate rise (or rises) that surprises the deliberately deaf and ignorant in politics, business and the media. 

The population is rising, the number of new homes being built is falling. Less land is being released, the homes being built or extended are getting larger, chewing up more resources and money. 

Prices are rising, even though there's now a fall in new loans because the first home buyers' scheme has been turned off.

It is a treadmill that can't last without some dramatic move from the Reserve Bank.

And, as the graph shows, the way population is growing and new home numbers are falling, the central bank has every reason to be worried. The current situation can't be sustained.

The bank's head of economics, Assistant Governor, Dr Phil Lowe was the latest in a growing list of senior central bankers out this week warning of the dramatic impact of rising house prices and the lack of any significant move to boost the number of homes being built.

"Looking forward, if population growth were to remain strong for an extended period, and we do not change the mix of housing that is being constructed, it is likely that we will need to devote a higher share of GDP to housing than has been the case historically," Dr Lowe said.

"If this does not happen, further adjustment in housing prices and rents is likely to occur to balance supply and demand.

"This raises two important issues that we need to think about.

"The first is the constraints that exist on increasing the supply of dwellings.

"If we are to build more dwellings, we need to ensure that planning guidelines and infrastructure provision can accommodate this. This will pose challenges for all levels of government.

"And the second issue is the capacity of the economy to deal with an increase in dwelling construction at a time when investment elsewhere in the economy is also very high.

"If housing construction is very strong at the same time that the resources sector is expanding, there will be competing demands for a range of skilled workers and specialised services.

"Managing these competing demands and ensuring the adequate supply of workers with appropriate skills will be a challenge."

Dr Lowe joins Governor Glenn Stevens, deputy Ric Battellino, assistant governor Guy Debelle, and head of research, Anthony Broadbent, who, in the past 9 months all pointed to the dangers of rapidly rising house prices, both to the economy and to the country's social fabric.

Mr Stevens started the warnings in a speech last July in which he said:

"If all we end up with is higher prices and not many more dwellings - then it will be very disappointing, indeed quite disturbing.

"Not only would it confirm that there are serious supply- side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track."

The evidence is so far, that we have ignored this. It is not a case of the first home buyers stimulating prices, it is that state and local governments, existing home owners and others have restricted the supply of new land for housing on a range of grounds, from the political to environmental.

That in turn has boosted property prices, making those existing land and home owners richer and more determined to block the releases.

As a result prices continue to rise, forcing the cost of all housing, new and existing higher.

Rents are rising strongly again, and that will feed through into inflation. 

State and local governments do nothing, except sit back and watch fee income and stamp duty receipts surge. Their warnings are hollow and conflicted.

Sure plenty of social policy groups issue warnings, but they lack the clout of the central bank.

Their warnings are routinely picked up by the media, especially newspapers and by TV news and current affairs, and then forgotten as the same media outlets breathlessly tell us of where the local and newest hot spots are, or where the 'bargains' are to be found.

Politicians talk about it and call for more land to be released and bag each other for hindering land development, and the developers protest, but know they are in on the game of ever rising prices for land and homes.

State and local governments are particularly conflicted, especially where politicians put their hands up for political donations from eager developers.

At the same time state and local governments know that by spruiking real estate and by boosting the cost of land and homes, their stamp duty and fee income rises quickly, filling holes in budgets ravaged by the GFC, slowdown and silly investments in financial products such as structured credit products that were supposedly AAA rated and safe.

One particular comment from Dr Lowe's stands out:

"If housing construction is very strong at the same time that the resources sector is expanding, there will be competing demands for a range of skilled workers and specialised services. Managing these competing demands and ensuring the adequate supply of workers with appropriate skills will be a challenge."

That's central banker's way of warning that if this surge in house prices (up 13.6% in 2009) is allowed to continue for much longer, then interest rates will go up very quickly and by more than the bank is hoping they will rise.

Rates will rise because the RBA knows that once competition heats up for concrete, steel, labour, bricks and other materials and services, then inflation will quickly spread through the rest of the community.

The Reserve Bank will be forced to bash the housing sector with a very blunt instrument: a series of rate rises that crushes demand for housing slows domestic consumption and frees up resources for use in the expanding resources and other sectors of the economy.

That's what the bank was in the process of doing in 2007 until the eruption of the credit crunch on August 9, two days after the RBA lifted the cash rate to 7.25%, its second last rate rise. The next was in September of that year as the election campaign started.  

And, as Dr Lowe pointed out, many of the pressures in housing are not because there are just one or two factors, such as a shortage of land, we ourselves have a lot to answer for. The rise in the second home, building renovations making older homes bigger (with fewer people inside) and the general trend to so-called super-sized McMansions.

There's a form of over-capitalisation happening in the belief that the sunk money can be recovered via ever rising house prices.

"While demographic factors have been important here, including a rise in the birth rate and the increase in the number of students undertaking post-secondary education, the increase in the cost of housing has also played a role.

"With population growth above average, and growth in the housing stock below average, it is not surprising that there has been upward pressure on housing costs as part of the process of balancing supply and demand, with the higher housing costs leading to people economising on housing services.

"Obvious examples of this are the trend towards young adults staying in the parental home longer, and a rise in the number of people sharing accommodation.

"Interestingly, the relatively slow growth in the number of dwellings does not reflect historically low levels of dwelling investment. In fact, the share of GDP devoted to the construction of dwellings over recent years is above the average of the past five decades.

"However, within total dwelling investment, renovation activity now accounts for a higher share than was the case historically, and the average size and quality of new dwellings has also increased substantially. The result of these developments is that for a given share of GDP devoted to housing investment, there is a smaller increase in the number of dwellings than was the case previously.

"In a sense, as a society there has been a trade-off between quality and quantity; in particular, we have implicitly chosen to build bigger and better-appointed dwellings, rather than more dwellings."

And if the RBA lifts rates and starts pushing back at housing, lots of people will profess amazement that housing is a mess, but many will be working off blind ignorance or self-interest.

The Reserve Bank and one or two other people have been warning of the dangers rapidly rising house and land prices could do to the economy by creating competition for resources wanted in the resources sectors.

But these warnings have been ignored. Time is rapidly approaching when the RBA will see the need to act, even in an election campaign.