House prices will continue to climb higher in Sydney, as the supply of land suitable for housing construction is “unusually low”.
Speaking at a public lecture held at the Australian National University in Canberra, Reserve Bank assistant governor Christopher Kent said housing construction is typically the most interest-rate sensitive component of expenditure in the economy; however with evidence of supply constraints in some parts of the country, particularly Sydney, prices will climb higher as supply doesn’t meet demand.
“In some cities, stocks of unsold lots suitable for development appear to be unusually low. Shortages are most evident in Sydney, where greenfield land releases have not kept pace with recent strong demand,” he said.
“Also, some of the Bank's liaison contacts are concerned that the stock of suitable sites for apartment developments in Sydney has been depleted in the past few years.”
Further, inflation of building material prices has risen and builders have increased their margins, as low interest rates fuel increasing demand from consumers.
Consistent with this, inflation in new dwelling costs has risen to be almost 2 percentage points above its average over the inflation-targeting period,”
According to Kent, the Reserve Bank remains cautious of Sydney’s supply and demand imbalance, which could pose a risk to economic stability.
“As the Bank has noted for some time now, large increases of housing prices, if accompanied by strong growth of credit and a relaxation of lending standards, are a potential risk for economic stability,” he said.
“Accordingly, the Bank is working with other regulators to assess and contain such risks that may arise from the housing market.”
In other parts of the country, however, housing construction is growing strongly in response to low interest rates.
“Despite the potential emergence of some constraints affecting the supply of new dwellings in pockets of the country, there appears to be scope for strong growth in new dwelling construction in other parts of the country. Moreover, alterations and additions activity could pick up,” Kent said.