There is likely to be no dramatic rebound in new dwelling investment in the next few years despite a build-up demand through population growth and other factors such as low interest rates, according to Jonathan Kearns, head of economic analysis at the RBA.
Kearns says there is likely to be a "relatively moderate" pick-up in the rate of dwelling investment in the medium term, with high prices holding back young adults from moving out of parents' homes.
This modest, medium-term outlook will be keenly considered by the RBA board given it noted in its monetary policy statement that “private residential building approvals, dwelling prices and auction clearance rates have all increased” in recent months indicating signs of a “prospective improvement”.
Delivering a speech today in Sydney on the outlook for dwelling investment Kearns said the high cost of housing relative to incomes was a factor holding back the demand for new housing, despite strong population growth.
“If housing was less expensive, then young adults may decide to move out of their parents' home earlier, people may decide to live by themselves rather than in a group household, and more people may decide to have a holiday home,” says Kearns.
In particular he placed the blame on the last boom in house prices in the late 1990s and early 2000s
“The sharp increase in house prices from 1999 to 2003 is likely to have had a dampening effect on household formation rates, and so the demand for housing," he said.
Kearns presented the following graph to show how new dwelling investment has declined over the past decade.
But Kearns also noted supply-side issues preventing a strong recovery including the supply of land.
“The ownership of undeveloped land has also been highlighted as an issue in some circumstances.
“Where the ownership of land on the city fringe is dispersed, say through many ‘hobby farms’, or equivalently in the inner city where existing blocks could be used for infill, it can be difficult for developers to negotiate the purchase of sufficient land to make development economically viable.
“Proposed developments can also attract opposition from nearby existing residents. These objections can take many forms including increased congestion, a change in the character of the area, environmental issues or reduced value of their own homes,” he said.
Overall though he says the information on the strength of demand related to demographic factors, and the tightness in the rental market, "suggest that the rate of new construction has been lower than might have been expected".