Boost in dwelling investment likely, says RBA

Boost in dwelling investment likely, says RBA

14 November 2012 by Simon Parker 0 comments

Dwelling investment is likely to pick up in the medium term albeit at a steady rate, a senior executive at the Reserve Bank of Australia (RBA) has said.

Jonathan Kearns, the RBA’s head of economic analysis, said yesterday that a number of key factors, including population growth, high rents and low construction rates, indicate an increase in dwelling investment is likely.

In an address at the Australian Business Economists' lunchtime briefing in Sydney, Mr Kearns provided a detailed account of the trends influencing dwelling investment.

One trend has been an increase in the number of people living in a household, which since 2000 has begun to increase, negating housing demand. Difficulties in developing greenfield sites, due in part to tighter planning rules and a shift to user-pays infrastructure development, has stymied dwelling construction levels, while the high demand for rental properties has also played its part in reducing the need for more housing.

"For the past seven years or so, real rents have been rising and the vacancy rate has been below its long-run average, suggesting the rental market has been quite tight," he said.

Looking ahead, Mr Kearns said the outlook for dwelling investment was more positive.

“While the long-run decline in the average number of people per household seems to have tapered off at least partly for demographic reasons, the strong population growth in recent years and the relatively low rate of dwelling construction suggest that there is sufficient demand for housing in the economy that an increase in supply could easily be absorbed,” he said.

“The relatively tight conditions in the rental market lead to a similar conclusion.”

He added that recent cuts to mortgage interest rates and income growth also pointed to an increase in dwelling investment.

“That said, some factors suggest that the recovery may be relatively modest, including that households have not shown an inclination to take on debt at the same rate they did in the 1990s and early 2000s, and that the ratio of prices to income is high, relative to its history, suggesting that it is unlikely that a large increase in prices is in prospect.

“Overall, it looks likely that dwelling investment will pick up at a relatively moderate rate in the medium term.”

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