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Cautious consumers could create a critical housing shortage

When the Reserve Bank started slashing interest rates last year, a lot of industry experts enthusiastically declared that the end of the real estate downturn was nigh.

And why wouldn’t they given that in the past, a steady decline in interest rates and the promise of future cuts have aided in stimulating the housing market and increasing buyer activity?

Times have changed though and consumers are far more cautious about spending in general, as is evident from recent figures released by the Housing Industry Association (HIA).

According to a Smart Company article, the HIA reported a 12.8 per cent decline in new home building for the March 2012 quarter.

And with the number of new build starts commonly used to determine the health of a major sector of our property markets, this latest statistic has a lot of people concerned.

The HIA forecasts a 5.9 per cent fall in starts over 2012 to see 139,360 new homes constructed over the year, with a modest recovery expected by 2013/14 of 151,200 new homes.

HIA senior economist Andrew Harvey said this marked downturn in new home construction had been coming for the past 18 months and was inevitable, due to the Victorian market coming off record highs.

“However, once you look outside Victoria there is long-term weakness in other states,” adds Harvey.

Rather than demonize the recent lackluster performance of our capital city property markets though, the HIA suggests government policy – specifically high taxes – is the major cause of the recent downturn in residential construction.

“The number one issue in terms of why new home building is so low is the level of taxation on new housing,” says Harvey.

“The primary issue outside of that is confidence at the moment.

“Consumers are being pretty cautious and paying down debts, so when you get an interest rate cut it does not have the stimulatory effect it did in the past.”

Harvey says it would make sense for the Reserve Bank to cut rates further next month, given their recognition of this recent deterioration in new home builds.

Paul Braddick, head of property research at ANZ said, “We are quite pessimistic about the new home building outlook for the next 12 months, you just have to look at the approvals numbers over the last year.”

“It is not yet even showing signs of finding the floor before seeing any upswing.

“From our perspective we are quite clearly underbuilding, new dwellings are running at a completion rate of 120,000 at the moment comparing to a long-term average of 150,000.

“Our estimation of housing demand based on demographics is 180,000.”

Braddick cautions that all of this adds up to the likelihood of a significant housing shortage, particularly in the NSW market, with the level of building scheduled over the next 12 months adding to the issue.

“Until prices find a floor and housing market sentiment generally starts to improve we are unlikely to see a sharp turnaround in building activity, particularly if we only get one more interest rate cut.

“It is hard to see what the catalyst for the turnaround is actually going to be in the next few years.”



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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