PROPERTY -- Further rate rises may stall much needed construction activity

The key to housing affordability lies in boosting construction activity, not raising rates.  

By: Belinda Luc
Journalist

When the RBA lifted the official cash rate to 4.5 per cent earlier this month, it said house prices had been "continuing to increase over recent months".

Specifically, the RBA observed that the market for established dwellings still had "considerable buoyancy".

In fact, house prices jumped an average of 20 per cent across all capital cities in the year to March - the biggest jump in 20 years, according to ABS figures.

Throughout the March quarter, median house prices increased 6.7 per cent in Melbourne, 5.3 per cent in Sydney and 5.4 per cent in Canberra. Brisbane, Adelaide and Perth enjoyed more subdued price growth at 2.0, 2.7 and 3.5 per cent respectively.

BIS Shrapnel chief economist Frank Gelber says property price growth is just the beginning: the cycle still has three to four years left to run.

And as house prices are expected to climb for several more years, it is anticipated that affordability will get a lot worse.

But interest rate rises are not the answer to cutting down prices.

High market prices are needed to help stimulate growth in the construction sector. The RBA's decision to hike the official cash rate three times this year may adversely impact the level of construction activity across the nation.

If the RBA further lifts rates on the back of rising house prices to curtail the house price boom, it may stall activity in the construction sector and the issue of supply will worsen.

Mr Gelber says the country is currently building about 140,000 dwellings each year - well down from the underlying demand of 190,000.

Urban Taskforce's Aaron Gadiel says as long as the supply of new homes is restricted, there will continue to be upward pressure on housing pricing and affordability.

"Interest rate increases won't change this," he says.