Housing investment likely to decline next year — RBA

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The Reserve Bank of Australia expects an anaemic housing supply next year that could result in a decline in investment – and an increase in residential prices as demand continues to rise.

Australia's housing construction would likely remain stuck in the doldrums until it bottoms out next year, RBA Deputy Governor Guy Debelle said in a speech at the CFA Societies Australia Investment Conference in Sydney.

"The long lead times on higher-density construction mean the supply response is likely to be slow. The tight conditions on lending to developers may mean it is even more protracted. The growth in demand without a meaningful supply response will lead to a larger price response," he said.

Also read: Is the RBA likely to cut rates again?

While the demand for housing is slated to increase, Debelle said housing investment could fall by another 7% next year.

"This will directly subtract around one percentage point from GDP growth from peak to trough," he said.

The housing sector makes up a significant part of Australia's $1.95tn economy, with residential construction accounting for around 2% of total employment and 6% of the country's gross domestic product (GDP).

A recent study by the Commonwealth Bank of Australia (CBA) confirms Debelle's projections that the construction downturn would only bottom out by mid-next year. The study also expects a shortage of apartments by 2020.

"On our calculations, the decline in residential construction is taking place at a time when the excess supply of dwellings is relatively small. Despite the massive boom in recent years, residential construction is below average relative to population growth," CBA economist Kristina Clifton told The Australian Financial Review.

Also read: Are investors heading back to the market?

The undersupply is expected to put upward pressure on dwelling prices, which, Clifton said, would increase the "attractiveness of new development".

"The Coalition election win, the Reserve Bank cash rate cuts and APRA's changes to serviceability metrics have seen the housing market turn around. We expect moderate dwelling price gains over the second half of 2019 and 2020," she said.

A recent analysis by the Housing Industry Association said Australia's stable population growth could breathe new life to flailing residential construction activity.

"Stable population growth is a welcome development for the residential building industry as it will support the industry as it recalibrates to a new equilibrium level," HIA economist Angela Lillicrap said.

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