Supply isn't the sure fire way to bring down prices says RBA official

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It’s often touted as the antidote to rising house prices, but a Reserve Bank of Australia official claims that increasing housing supply won’t automatically bring prices down.

Speaking on Tuesday to a real estate conference in Sydney, RBA head of financial stability Dr Luci Ellis said the desire of people to live in certain areas will result in price increases regardless of how much land is released for housing.

Dr Ellis people’s desire to live in areas with established amenities in place should not be underestimated.

“Yes, some people like a bigger garden, for privacy or to enjoy in other ways,” Dr Ellis told those in attendance.

“But being in the 'right' kind of neighbourhood with the best amenities, close to commercial centres and other services, is more important to most people, if their willingness to pay for it is any guide,” she said.

The fact that those desirable areas present limited opportunities for buyers is the main reason prices rise and won’t reversed by releasing land in other areas Dr Ellis said.

“The physical reality is that the supply of good locations is more or less fixed in the short term," she said.

“So any sizeable boost to demand cannot be fully absorbed by more supply.”

Dr Ellis said this phenomenon was the reason why suburbs surrounding the desirable areas see their prices rise as gentrification takes place.

“To give a few examples, in the space of a few decades, suburbs like Paddington, Newtown and Balmain in Sydney or Fitzroy and Northcote in Melbourne went from 'scary, to edgy, to trendy, to pricey'.

“The housing stock was also renovated in this process, but most of the price action can probably be explained by the rising relative price of those locations.”

Similar transformation is currently being seen in Sydney’s south and inner-west, where traditional industrial areas are being turned into predominantly residential areas.

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