Housing supply challenges recovery

AAP

A GREATER share of the economy needs to be devoted to housing to deal with a population boom, otherwise property prices and rents will rise, the Reserve Bank of Australia (RBA) says.

The new phase of economic expansion also means emerging labour and skills shortages have to be dealt with, RBA assistant governor (economics) Philip Lowe says.

A second challenge was the capacity of the economy to deal with an increase in dwelling construction at a time when investment elsewhere in the economy was very high.

"If housing construction is very strong at the same time that the resources sector is expanding, there will be competing demands for a range of skilled workers and specialised services," Dr Lowe told a business audience in Sydney.

"Managing these competing demands and ensuring the adequate supply of workers with appropriate skills will be a challenge," he told the Urban Development Institute of Australia National Congress on Wednesday.

Dr Lowe said Australia was likely to devote a higher share of its GDP to housing than has been the case historically, or risk a further adjustment in housing prices and rents to balance supply and demand.

Unlike most countries rocked by the global financial crisis, Australia did not have an unsustainable surge in dwelling investment in the middle years of the 2000s resulting in oversupply of housing, he said.

Dr Lowe said business investment in Australia was around 16 per cent of gross national product, close to a 40-year peak, and was expected to rise over the next two years.

However, the growth rate of dwelling construction had been below the average of the past 50 years, while the population now was increasing at its fastest pace over the same period.

"If we are to build more dwellings, we need to ensure that planning guidelines and infrastructure provision can accommodate this. This will pose challenges for all levels of government.

"Elsewhere, the challenge is to get private demand to grow on a sustainable basis so that it can catch up with the supply potential of the economy," Dr Lowe said.

"In contrast, for Australia, the main task is to expand the supply side of the economy so that demand can grow solidly without causing inflation to rise."

Citigroup global markets director Paul Brennan said Dr Lowe's speech highlighted the need to focus on the supply side of the economy and that controlling demand through interest rates would remain the RBA's central tool.

"Given that supply-side policies take time to implement and impact with long lags, monetary policy will continue to be the policy of choice to address the inflation pressures that we expect to develop by next year," Mr Brennan said in a research note.

Some market analysts say the RBA will again lift the rate if Thursday's Australian Bureau of Statistics labour force data shows strong growth.

An AAP survey of 11 economists last week found that 10,000 jobs were expected to have been created in February and the unemployment rate was tipped to rise to 5.4 per cent, from 5.3 per cent the previous month.