Interest rate rise will seriously hamper housing construction

THE Reserve Bank’s decision to lift the cash rate on Tuesday will have a profound effect on housing construction, according to the Housing Industry of Australia.

HIA’s chief economist Tim Reardon said the interest rate hike reflects the ongoing challenge of bringing inflation under control but warned that higher rates will further restrict the supply of new homes.

“Monetary policy has an important role in managing inflation and the RBA’s actions reflect the persistence of price pressures across the economy,” Reardon said.

“However, higher interest rates also increase the cost of delivering new homes and make it more difficult to finance new housing projects.

“As a result, this decision is likely to reduce the number of new homes commencing construction at precisely the time Australia needs more housing supply.”

Reardon said the impact of higher interest rates on housing supply risks intensifying the structural shortage of homes, placing further upward pressure on both rents and house prices.

“Constraining the supply of new homes does not reduce housing costs, it does the opposite.

“When fewer homes are built, competition for existing housing increases, pushing prices and rents higher and adding to housing inflation.”

Reardon added policy settings across all levels of government will now become even more important in determining whether Australia can address its housing shortage.

“If governments are serious about improving housing affordability, they must focus on increasing the supply of new homes,” he said.

“The only sustainable way to reduce housing costs is to lower the cost of delivering a new home.

“This means reducing the taxes, charges and regulatory barriers that add to the cost of new housing.”

Reardon warned that proposals currently being discussed to increase taxes on property investors would move policy in the wrong direction.

“At a time when higher interest rates are already restricting housing supply, increasing taxes on investors would further discourage the investment needed to finance new housing projects,” he said.

“Policies that reduce investment in housing will inevitably reduce supply and push housing costs higher.

“The logic that increasing taxes on investment in the established market will see more investment in new home building is flawed.

“Taxing used cars does not lead to new cars becoming more affordable. The same logic applies to housing.

“Investors know that they incur the new tax in the future and take that into consideration in making the decisions.”

Reardon said the focus should instead be on policies that encourage the construction of new homes.

“The solution to Australia’s housing shortage is straightforward: lower the cost of building new homes and encourage investment in new housing supply,” he said.

“Reducing taxes and charges on new housing, speeding up planning approvals and lowering regulatory costs would do far more to improve affordability than policies that further restrict housing investment.”