RBA should avoid playing Russian roulette with the housing supply

06 April 2010

The Reserve Bank board meeting today must avoid playing Russian roulette with Australias housing supply and should keep interest rates on hold, according to the Urban Taskforce.

The Taskforces chief executive, Aaron Gadiel, said the supply of housing across Australia was fragile.


The Reserve Bank has been using increased interest rates as a weapon against home price inflation, Mr Gadiel said.


Interest rate rises reduce demand for housing, but the origins of this problem lie on the supply-side.


Interest rates shouldnt be used to attack housing demand when the problem is clearly one of supply.


Mr Gadiel said that home prices have been rising because the Australian housing market was undersupplied by close to 200,000 homes.


State planning laws and levies are still preventing vital urban development projects from taking place, he said.


Without regulatory reform, the only way expensive planning requirements and high development levies can be paid for is through higher prices.


If interest rate increases stymie rising home prices, they will also block efforts to boost housing supply.


Mr Gadiel said that developers are also having great difficulty in securing bank finance for their projects.


Weaker housing demand courtesy of interest rate increases makes it more difficult to demonstrate project viability to a bank, Mr Gadiel said.


Any increase in interest rates undermines demand for housing and boosts the holding costs faced by developers.


Each interest rate rise is tantamount to a game of Russian roulette with Australias housing supply.


Mr Gadiel said that recent Australian Bureau of Statistics figures suggested that recent improvements in the housing supply were tentative.


Across Australia weve seen a 4 per cent seasonally adjusted decline in new home approvals, in the first two months of this year.


Both NSW and Victoria have seen significant falls in seasonally adjusted private sector home approvals over these two months – 26 per cent and 17 per cent respectively.


Now is not the time to risk further interest rate increases.


The Urban Taskforce is a property development industry group, representing Australias most prominent property developers and equity financiers.


For every $1 million in construction expenditure, 27 jobs are created throughout the broader economy.


The construction activity made possible by property developers contributes $78 billion to the national economy each year and creates 849,000 direct jobs



Download PDF Version