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Sydney Housing Shortage Is Growing

27 June, 2011

New home construction doesn’t meet demand – Phil Keeffe Population growth and a shortage of new housing are keeping Sydney real estate prices at unaffordable levels. An interest rate cut is needed.

Sydney property remains a sound investment. A Sydney Morning Herald article by Antony Lawes analysed price growth on Sydney’s north shore and found that over the past ten years the average annual price growth in Neutral Bay was 4.3%, in Mosman was 6.68% and McMahons Point was 8.3%.

Despite a slowdown of real estate activity since 2008, NSW experienced a rise of 5.3% in sales of new homes in 2011, and recent Sydney auction clearance rates hover around the 55% level.

But HIA chief economist Harley Dale told AAP that the housing sector needs more support for a full recovery.

“In a contemporary economic environment where interest rate settings are too high, finance conditions persistently tight, consumer and business confidence too low, and plans to tighten fiscal policy inappropriate, it is hard to envisage a sustained recovery in new home sales in coming months”, he said.

However, at its April meeting the Reserve Bank of Australia once again decided to leave its cash rate unchanged. In his statement following the RBA’s Board meeting on 3 April, Governor Glenn Stevens was less than bullish about the global economy.

“Recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring,” he said.

An article by Malcolm Maiden in The Age said the RBA was likely to announce a rate cut at its next meeting 1 May. He described a May rate cut as ‘almost a no-brainer’: “It wont push inflation beyond the Reserves 3% ceiling, and economic growth isnt as strong as expected.”

However, the banks can always raise their interest rates independently of whatever the RBA may do. On 13 April the ANZ announced it was raising its mortgage interest rate by six basis points and hinted that Australia’s other major banks may follow suit.

A rate cut is definitely on the wish list of the Australian housing industry. An AAP release on pointed out the current weaknesses indicated by the Australian Industry Group/Housing Industry Association performance of construction index.

“[The index] had a reading of 36.2 in March, up 0.6 points from the month before. Readings below 50 indicate contraction.”

The AAP report quoted Australian Industry Group director of public policy Peter Burn who said that weaknesses in housing are impacting on other areas of the economy.

“Very weak conditions continue in the house and apartment building and commercial construction sectors, and this is flowing on to a cross-section of service and manufacturing businesses.”

There is of course no simple fix for Australia’s growing housing shortage. The figures gathered by the Australian Bureau of Statistics and a number of private organisations all point to the same thing: an industry in crisis.

A new report by a UK housing expert, ‘Homes for All’, found that Australias housing market is producing only half of the supply needed to meet demand.

The report’s co-author, Dr Tim Williams, says that Australians are building 14,000 to 15,000 homes a year when the figure should be more like 40,000.

“Rents in Sydney are rising four times faster than inflation. The squeezed middle which used to be able to afford to buy now has to rent, pushing lower income renters to find the fewer remaining cheaper lettings and again further out of Sydney to places with the fewest jobs.”

This isn’t news to any Sydneysider trying to find rental accommodation. An article by Vikki Campion in the Daily Telegraph said the city’s rental crisis was growing as the population boom puts pressure on housing.

“Real Estate Institute of NSW data shows vacancies in the inner suburbs fell to 1.5%, while the number of properties located up to 25km from the CBD dropped to 2.0%”

There’s no doubt the problem will persist for several years, with consequent and ongoing rises in housing costs, rental rates and shortages of affordable housing.

Before the RBA’s April meeting Mark Hewitt, general manager of Sales and Operations for mortgage broker Australian Finance Group said: “The best thing the RBA could do to stimulate confidence among buyers and upgraders would be to cut interest rates tomorrow.

The Housing Industry Association (HIA) and Master Builders Australia also called for a cut in the RBA’s cash rate in the hopes of stimulating construction of new housing, but the Bank remained unmoved.

In March a report by global investment bank JP Morgan and technology group Fujitsu concluded that growth in mortgage lending will continue to slow.

Fujitsu executive director Martin North said there would be no return to the ‘buoyant’ era pre-GFC and mid single-digit growth was the best that could be hoped for over the next decade.

A reduction in the RBA’s cash rate is without doubt one of the most effective ways of supporting the housing industry and all those employed by it.

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