Navigating Rising Property and Rental Prices: Current Market Dynamics

The Reserve Bank has cautioned against expecting a rapid solution to the escalating property and rental market prices, citing significant hurdles like escalating construction expenses that discourage developers from providing the much-needed housing supply.

This warning coincides with mounting pressure on project funding due to rising interest rates, despite optimistic inflation projections from the Treasury. Chief Economist Sarah Hunter of the RBA described the current situation as a 'perfect storm' of obstacles impeding construction progress. She noted that housing and rental costs are likely to continue their upward trajectory for the foreseeable future.

Hunter explained that the aftermath of the pandemic, coupled with diminished demand, has led to a decade-low in dwelling approvals per capita. This decline reflects a scenario where some developers have postponed or abandoned projects due to the disproportionate costs of construction compared to anticipated returns.

The surge in both material and labor costs has rendered many residential developments financially unviable. Additionally, the escalation of interest rates, from 0.1% to a 13-year high of 4.35% within 18 months, further compounds the issue by increasing the cost of project financing.

Despite earlier expectations of a rate cut, which had been projected as early as September of the current year but now postponed to July 2025, the reality of inflation surpassing forecasts indicates a more prolonged timeline for any potential rate adjustments.

The recent Consumer Price Index (CPI) figures reveal a stronger-than-expected 1% increase during the March quarter, with an annual inflation rate of 3.6%, still above the RBA's target range of 2-3%. While the government's budgetary measures aim to address inflation concerns, some economists remain skeptical about their efficacy.

HSBC's chief economist, Paul Bloxham, anticipates that while these measures may temporarily reduce inflation in specific sectors such as energy and rent, increased disposable income from subsidies and tax cuts could potentially fuel higher consumer spending, thus supporting, rather than alleviating, inflationary pressures.

Despite optimistic Treasury forecasts suggesting an earlier return to target inflation rates, economists and market indicators remain steadfast in their anticipation of a delayed rate cut. This uncertainty surrounding interest rates prolongs the challenges faced by both homeowners and prospective buyers, with the supply-demand imbalance continuing to exert upward pressure on rents and property prices.

Efforts to streamline approval processes at both federal and state levels may eventually ease construction costs, but any tangible impact on supply is not expected to materialize swiftly. Consequently, residential construction activity is projected to remain subdued in the interim.

Paulette Contessi 

Director / Licensee

CONTESSI PROPERTIES