Australia’s housing needs have raised to a new record high of 182,000 new dwellings per annum, according to the latest estimates from BIS Shrapnel, substantially above the 151,000 new dwellings actually commenced in 2006/07.

The low rate of dwelling construction relative to underlying demand has now become a factor in the outlook for inflation and interest rates, according to BIS Shrapnel senior manager, Jason Anderson.

With rental markets tightening, growth in average rentals is accelerating in all capital cities and Anderson expects this trend will continue into 2007/08, adding further pressure to inflation.

The expansion in housing needs is largely due to the new heights being registered for net overseas migration, explained Anderson.

BIS Shrapnel forecasts Australia’s population gain from net overseas migration will reach 185,000 persons in 2007/08, the highest annual inflow on record. This inflow comprises both permanent migrants and long-term visitors (workers and students).

During the next five years, more than half of Australia’s population increase will come from overseas migration (up from 39% during the 1990s).

“We believe continued strong employment growth will depend on a high population inflow from other countries,” said Anderson.

“This means the provision of an adequate supply of housing is a key contributing factor to Australia’s long-term economic growth. In particular, with the number of long-term visitors running at a very high level, there is an increasing demand for rental housing.”

Anderson says the current rate of residential construction is substantially below underlying demand.

There were 151,000 national dwelling commencements in 2006/07, and BIS Shrapnel forecasts a similar level of commencements for 2007/08 contributing to a greater deficiency of dwellings. The deficiency is forecast to reach about 100,000 dwellings by June 2008, which would equate to eight months of construction.

“The undersupply of housing is leading to an acceleration in rents. As housing rentals are a component of the CPI (comprising 5.3% of the index), this trend is putting upward pressure on inflation,” explained Anderson.

BIS Shrapnel expects this pressure will grow over the course of 2007/08. National average rentals increased by 3% over the year to June 2006, with the growth rate picking up to 5.2% over the year to June 2007 (as measured by the rental index component of the CPI).

BIS Shrapnel forecasts the Australian Bureau of Statistics (ABS) rental index will show an increase of 8.4% over the year to June 2008.

This forecast would contribute an extra 0.2% to the inflation rate by June 2008.

“Given the current underlying measures of inflation are high relative to the Reserve Bank of Australia target range, we expect the shortage of rental properties will be a significant factor contributing to a further interest rate rise in the next six months,” said Anderson.

BIS Shrapnel forecasts an interest rate rise in March quarter 2008, but also considers that there is some chance the CPI result on Wednesday, October 24, will be high enough to cause a rate rise in November 2007.

A further interest rate rise would stifle the recovery in dwelling commencements in 2008 and extend the pressure on average rentals, according to Anderson. This raises a dilemma for the Reserve Bank of Australia (RBA).

“The RBA is expected to raise the cash rate to quell demand-inflationary pressures, stemming from strong growth in consumer spending and employment. But an interest rate increase will have a counter-productive supply effect on housing and will actually add to inflationary pressure from the rental market,” cautioned Anderson.

Eventually, BIS Shrapnel expects the rise in rentals will be a factor behind a recovery in dwelling construction from 2009, as a rising number of tenants elect to become owner-occupiers, and growth in rentals attract investors back to the market.

New South Wales

Activity in New South Wales reached a near 50-year low in 2006/07, with only 29,300 housing starts. This rate of construction is substantially below the level of underlying demand, which BIS Shrapnel estimates at 49,400 dwellings.

The huge gap between supply and underlying demand in New South Wales is leading to a substantial increase in the dwelling stock deficiency, which Anderson estimates will rise to 41,400 dwellings by June 2008.

The ABS index for Sydney residential rentals increased by just 2% over the year to June 2006, but the rate of growth accelerated to 4.2% over the year to June 2007. With the rental market clearly tightening, BIS Shrapnel forecasts the rate of growth in residential rents will rise to 7% by June 2008.

Anderson notes the New South Wales State Government recently announced cuts to State and Local Government infrastructure contributions for new land release areas in the Western Sydney Growth Centres.

These changes should be welcomed as a means of addressing the extremely low rate of dwelling construction, but it will take time for lower land prices to feed through into higher house construction.

Victoria

Activity in Victoria has declined for five consecutive years, with housing starts down 2% to 38,500 in 2006/07. While supply has been decreasing, population growth in Victoria has been very solid. The current rate of construction is substantially below the level of underlying demand, which BIS Shrapnel estimates at 46,000 dwellings.

The significant gap between supply and demand in Victoria is leading to a substantial increase in the dwelling stock deficiency, which Anderson estimates will rise to 24,500 dwellings (or six months of construction) by June 2008.

As a result, the rental market is very tight, and the rate of growth in Melbourne residential rents is forecast to rise to 7.3% by June 2008.

Queensland

Dwelling construction in Queensland has been below underlying demand for several years. As a result, Queensland has provided the earliest evidence of a tightening rental market. The residential rental index is in the midst of an established acceleration period, having shown average annual growth of 6% over the three years to June 2007.

The extended rise in rentals has contributed to a recovery in demand for new dwellings, as BIS estimates commencements increased by 8% to 40,800 in 2006/07.

Nevertheless, Anderson says supply remains below demand, so the rental market will remain tight. As such, the index for Brisbane residential rents is forecast to increase by a further 9.2% over 2007/08.

South Australia

BIS Shrapnel anticipates the level of underlying demand and residential construction activity will reach balance in South Australia throughout 2007/08. Demand for housing has been boosted by a large increase in the overseas migrant inflow. As a result, the rental market is very tight, with Adelaide’s vacancy rate below 1%.

The Adelaide rental index increased by a solid 4% in 2006/07, and on the back of an increase in overseas migration (due to South Australia’s relative housing affordability advantage), BIS Shrapnel forecasts a 7.8% rise in the rental index over the year to June 2008.

Western Australia

Fuelled by the residential property price boom to the end of 2006, residential building activity in Western Australia remained high at 24,600 starts in 2006/07.

However, with affordability reaching a critical point in 2006/07, BIS Shrapnel forecasts commencements will fall by 10% in 2007/08. This drop in construction will mean the residential rental market remains tight.

The tight market has meant the Perth residential rental index increased by 4.7% in 2005/06, before accelerating to show a rise of 9.6% in 2006/07. When combined with the severe vacancy shortage, BIS Shrapnel forecasts the residential rental index will rise by 10.3% over 2007/08.

Tasmania

With an interstate migration inflow becoming an outflow in 2006/07, the highest residential vacancy rate in Australia, and the presence of a stable dwelling stock surplus, BIS Shrapnel expects the Tasmanian residential rental index will experience the least amount of growth in Australia.

The rate of construction in 2007/08 should be on par with underlying demand, which reduces the likelihood of increased pressure in the rental market. Given the rental index for Hobart expanded by 5.1% and 5.5% in 2005/06 and 2006/07 respectively, BIS Shrapnel forecasts the Hobart residential rental index will increase to 6.6% in 2007/08.

Northern Territory

The rate of dwelling construction in the Northern Territory in 2006/07 was well below underlying demand. BIS Shrapnel forecasts the dwelling stock deficiency will continue to increase, placing further pressure on the tight rental market in the Northern Territory.

Darwin’s residential rental index registered modest growth in 2005/06 (4.4%) and then surged in 2006/07 (8%). BIS Shrapnel forecasts the residential rental index will rise by 9.5% over the year to June 2008.

Australian Capital Territory

The rate of dwelling construction in the Australian Capital Territory in 2006/07 was well below underlying demand. BIS Shrapnel forecasts the dwelling stock deficiency will continue to increase, placing further pressure on the tight rental market in the Territory.

Canberra’s residential rental index registered modest growth in 2005/06 (2.9%) and then picked up in 2006/07 (5.4%). BIS Shrapnel forecasts the residential rental index will rise by 8.5% over the year to June 2008.