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Supply and demand the cause of price rises

By Claire Briggs

Strong price growth in the residential real estate market in Australia has led many to point a finger toward foreign investors. However, a new report from the Centre for Independent Studies (CIS) has shown it’s the effect of supply and demand that has been the culprit.

The report, titled Eight Housing Affordability Myths, analysed many economic factors that have led to house price growth in recent months. A strong rise in population, low interest rates for home loans and growth in household incomes have all played a part in this. However, the report found it’s also a “critical lack of new housing supply” that has “fuelled long-term increases in real house prices” all over the country.

“Foreign investors and domestic investors have been made scapegoats when it comes to housing affordability, but they are no more to blame for rising house prices than first-home buyers,” said CIS research fellow Dr Stephen Kirchner.

“The problem is not too much demand, but too little supply.”

Dr Kirchner noted the low level of land supply dipped over the last ten years, affecting the availability of land for new homes.

High hopes for home building

Despite a less than favourable level of new homes being built over recent years, this is expected to pick up. A new BIS Shrapnel report predicts national building commencements will reach 190,000 in 2014/15. The previous peak was 187,000, back in 1994.

A large proportion of these new dwellings, the report predicts, will be high-rise apartments and units.

With a rapidly growing population, there needs to be enough houses to meet this demand. BIS Shrapnel estimates the national market is currently 100,000 dwellings short from meeting requirements.

“We estimate that it will take the next five years to eliminate the unmet demand for housing. We therefore do not see this housing shortfall closing until 2018,” BIS Shrapnel associate director Dr Kim Hawtrey said.

Prices will continue to rise

Even though more homes on the market will help ease some of the pressure from demand, prices are predicted to keep rising.

The Australian Property Monitors (APM) House Price Report for the June quarter showed very strong house price gains over recent months. APM senior economist Andrew Wilson noted the “capital city housing markets show no signs of a significant slowdown in prices growth through the mid-year period”.

Looking ahead to the rest of 2014, Dr Wilson expects moderate to strong house price growth. Brisbane, Adelaide and Hobart will be the strongest cities for growth, while real estate in Sydney, Melbourne and Perth will see moderate growth.

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