Rate rise won't solve Australia's housing inflation problem

GOVERNMENT policies are undermining the Reserve Bank's attempts to curb inflation, according to Ray White Group chief economist Nerida Conisbee.

The Reserve Bank has increased interest rates this week following another disappointing inflation result.

Headline inflation reached 4.3 per cent in September, while underlying inflation remained at 3.6 per cent, well above the RBA's target.

"The challenge is that inflation remains elevated even as the economy shows clear signs of slowing," Conisbee said.

"Employment fell by almost 40,000 in September and unemployment is now at 4.7 per cent. This makes further interest rate increases increasingly difficult to justify as previous increases continue to work their way through the economy.

"Housing provides a particularly good example of why inflation is proving difficult to control.

"Despite falling established house prices, housing remains the largest contributor to inflation, increasing 5.2 per cent over the year.

"The housing component of the CPI includes new dwelling construction costs, rents and electricity, rather than changes in established property values."

New dwelling prices rose 4.7 per cent annually but were unchanged in September.

"At the same time, underlying construction costs are accelerating again," Conisbee said.

"Builders are increasingly relying on discounts to attract buyers, despite facing higher costs."

Conisbee said government spending is contributing to these pressures.

"Major state infrastructure projects compete directly with residential construction for builders and skilled trades, often offering significantly higher wages and more secure work," she said.

"This draws workers away from home building and pushes construction costs higher.

"While infrastructure investment is important, governments need to recognise that their own projects can make housing more expensive and difficult to deliver.

"Further interest rate increases risk making this situation worse by raising development financing costs and reducing demand for new homes. This could delay the additional housing supply Australia desperately needs."

The rental market is another concern.

Rents have continued rising at an annual rate of 3.6 per cent since May, despite broader weakness in the property market.

Investor activity has fallen sharply, with new investor loan commitments declining 8.6 per cent in the June quarter.

"The Federal Budget's changes to negative gearing and capital gains tax are discouraging further investment," Conisbee said.

"This is significant for inflation. Reduced investor participation restricts rental supply, with these effects to continue to flow through to rental inflation.

"Government policy is therefore contributing to pressure on two major components of housing inflation.

"State infrastructure spending is competing for scarce construction workers, while federal tax changes are discouraging investment in rental housing.

"Higher interest rates may reduce demand in the short term, but they risk making these structural problems worse.

"Ultimately, the RBA cannot be expected to bring housing inflation under control while government policies are making housing more expensive to build and discouraging investment."