RBA Ellis: Watching Out For Rise In Actual Housing Rents Paid

--Rise in actual housing rents paid something to watch out for
--Expect price “shift” as demand for new housing fades, interest rates rise
--But difficult to know when that will happen
--Fall in average household size offset decline in population growth
--Desire for more space further from office might wane over time as lockdown memories fade
--Housing stock likely to grow faster than population as construction remains solid
--Unusually large pipeline of detached homes yet to be completed
--Residential housing construction industry is at capacity

By Sophia Rodrigues

(Sydney, May 25, 2022)—The Reserve Bank of Australia is watching out for rise in actual rents paid, given the increase in advertised rents and decline in vacancy rents, Assistant Governor Luci Ellis said Wednesday.

Ellis also said there will be a price “shift” in the housing and construction markets as interest rates rise and as the effect of measures boosting housing construction wane.

Ellis made the comments in a keynote speech to the UDIA 2022 National Congress on the topic, “Housing Market in the Endemic Phase.”

Ellis noted that housing vacancy rates in Sydney and Melbourne have declined recently, and in other capital cities they remain around historical lows. Advertised rents have increased quickly but this will take some time to flow through to the stock of actual rents.

Ellis said while it is natural to focus on the opening of borders and resumption of population growth as drivers of higher rents, similar surges are evident in the United States and the United Kingdom, and in countries like Canada, rental inflation is running at the fastest pace in many years.

“We aren’t seeing this here in Australia, at least not yet. It is something to watch out for.”

Ellis stated at the outset of the speech that she won’t add anything on monetary policy or say much about the prices of established homes. The speech focused on some of the underlying drivers of housing demand and the capacity of the construction industry to meet that demand.

According to Ellis, the average household size declined since the pandemic, leading to increased demand for home. This explains why rental vacancy quickly returned to low levels even though the international border was closed and population growth declines to be close to zero.

The decline in household size absorbed much of the expansion in housing stock in recent years. And housing stock is expected to grow faster than the population because new home construction is expected to remain solid for the next couple of years.

Looking ahead, some of the effects of the pandemic on the housing market like the desire for more space further from the office, might wane over time, Ellis said.

On construction, Ellis said the residential construction industry is at capacity and cannot work down the pipeline any faster. The RBA’s expectation is dwelling investment will remain high for some time.

“The divergence in the relationship between dwelling investment and its usual drivers also suggests that construction is at capacity,” she said. The delays are due to the availability of materials, including appliances, and labor.

Also putting pressure on residential construction is the large pipeline of public infrastructure projected and non-residential construction where the pipeline of work yet to be done “is at the upper end of its normal range relative to the size of the economy.”

Over time Ellis expects the short-term fillip to demand from HomeBuilder and the boost from current low interest rates to wane, and will result in “shift” in prices.

“Exactly when that will happen is hard to know. But when it does, we can expect some of the current rate of cost escalation and squeeze on margins to ease,” Ellis said.

--Contact: Sophia@centralbankintel.com