Why they will stay stronger for longer

According to Reserve Bank chief economist Sarah Hunter: “Just under 27 million people live in Australia in about 11 million households. The average number of people living in each household has trended lower, from around 2.8 in the mid-1980s to around 2.5 of late.

“This may sound like a small change. But, if for some reason average household size rose back to 2.8, we would need 1.2 million fewer dwellings to house our current population – no small difference.”

She notes that despite the increases in demand and accompanying rise in rents and prices, it is curious that more housing supply isn’t being built.

“Our assessment is that, at a high level, the last couple of years has seen a perfect storm of constraints on activity,” Hunter says.

The bottom line is that the cost to build – be it from higher material costs or higher labour costs – doesn’t stack up for developers.

Hunter says that demand pressure, and so upward pressure on rents and prices, will remain until new supply comes online. She says the Reserve Bank expects this response to take some time to materialise, given the current level of new dwelling approvals and information from liaison with industry that many projects are still not viable. In the meantime, it is expected that residential construction activity will remain relatively subdued.

A significant portion of dwelling construction costs are the direct costs of building materials and labour. In recent years these have risen sharply, and we do not expect them to fall back significantly. Pandemic-related supply chain disruptions and competition for resources from other types of construction have pushed up prices significantly, by nearly 40 per cent since late 2019.

Having navigated through the temporary disruption created by the pandemic, the sector is now facing weaker demand – dwelling approvals per capita are sitting at decade-lows. In other words, some market participants have delayed projects or decided not to begin because of the relatively high cost of building when compared with the project’s returns.

The government alone cannot solve this imbalance in supply and demand. The pipeline of approved projects is large and there is a bulge of new projects started but not completed.

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A significant portion of dwelling construction costs are the direct costs of building materials and labour. In recent years these have risen sharply, and we do not expect them to fall back significantly, says Hunter.

High interest rates are another cost that are taken into account by property developers.

These should begin to come down over the next 12 months, but they are only part of the equation. Housing supply will ultimately improve. But it will be a slow grind.