Inflation pressure keeps heat on housing crisis

TACKLING the housing crisis could keep inflation higher for longer, judging by remarks made by Michele Bullock and her RBA colleagues at the latest parliamentary economics committee hearing.

The Reserve Bank governor conceded that inflation will not return to its 2 to 3 per cent target band until the end of 2025. That means a cut to the 4.35 cash rate is off the cards for 2024, despite numerous market commentators pricing in a cut for November or December.

With residential housing costs a “big part of the inflation basket”, it raises questions about the federal government’s plans to build 1.2 million houses over the next five years.

Inflation in household construction rose at an annual rate of 5.1 per cent according to most recent measures and was slowing inflation’s progress back towards its 2 to 3 per cent target band, Bullock warned.

“Construction costs have continued to rise more in Australia,” she said during a House of Representatives hearing where she admitted “uncertainties around residential construction” were a worry.

“What we observed coming out of the pandemic was supply chain issues and strong demand to build houses,” Bullock said.

“That resulted in a large increase in costs in the construction industry – a shortage of people as well.”

While shortages that drove costs up by 20-25 per cent immediately after COVID have subsided over the past year, building costs are still up by that 5.1 per cent figure, she explained.

Expanding on problems facing those involved in building high-density housing projects like social housing, Bullock noted that there was a conflicting demand for skilled tradies from commercial non-residential developers.

“What we hear from our liaison with construction companies, and particularly residential higher density, is that competition with non-residential construction and also infrastructure is meaning that it’s difficult to get staff and trades,” Bullock said.

Difficulty in finding staff had drawn out the time it was taking to finish home building as housing completions lagged new starts, she said. Those that do get finished are unaffordable, she added.

Competition for skilled tradies will clearly have an impact on wage demands too.

RBA Chief economist and assistant governor Dr Sarah Hunter’s remarks at the hearing also show why there is ongoing friction between the need to build more to tackle the housing crisis, and trying to tame inflation.

“Building costs – rental and new builds –are big parts of the inflation basket,” she said, admitting the RBA was concerned the housing shortage could become entrenched.

“It’s very challenging in the sector at the moment,” Hunter added, noting that ongoing supply side issues had led to a sharp decline in building, especially for small scale builders.

“It’s unlikely to resolve itself in the near term.”

While Bullock conceded that the fact rates would not fall in the near term was not news Australians wanted to hear, she maintained bringing inflation down was necessary.

“The alternative of higher inflation for longer is much worse,” she said. “We know that it hurts people with mortgages and debts, businesses with debts more.

“High inflation hurts everyone.”