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House prices expected to rise by 40%

28 March 2008

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Australia's housing affordability crisis is expected to dramatically worsen during the next five years, with property prices forecast to rise by as much as 40 per cent.

Economic forecaster BIS Shrapnel says housing affordability, already at record lows, will decline even further in the years ahead as demand continues to outstrip supply.

BIS Shrapnel director and chief economist Frank Gelber said an annual construction shortfall of 30,000 dwellings was set to double to 60,000 by June this year and rise to 129,000 by June 2009.

The shortfall in supply will put further upward pressure on rents and house prices, further exacerbating the affordability problem caused by the house price boom of 2002-03.

At that time, official interest rates were at 4.25 per cent but have since risen to a 12-year high of 7.25 per cent.

Mr Gelber says the current environment of rising interest rates has compounded the problem, with people choosing to wait before buying or building property.

This also meant that when interest rates stopped rising or eventually started to fall, there would likely be a surge in demand for housing which could result in another price explosion.

"We've got rising interest rates suppressing any upswing in demand for housing ... and we need to wait now before that demand comes through," Mr Gelber said.

"But when it does, it will be very strong."

The figures quoted by Mr Gelber are largely in line with Australian Bureau of Statistics (ABS) data.

Calculations, based on the ABS established house price index, show that during the 10 years to December 2007, house prices rose an average of 9.9 per cent a year. The index rose 12.3 per cent in 2007.

In the 10 years before that, house prices rose an average six per cent a year.

In the past 20 years they have risen an average 7.9 per cent a year.

However, Harley Dale, chief economist with the Housing Industry Association, says the fact the issue of housing affordability has been recognised at both an industry and government level means price growth similar to what has been seen in recent years is less likely.

"We've been saying for some time that there's a large shortfall in housing stock and that's one of the factors that drove very strong growth in established house prices over 2007," Mr Dale said.

"There's no doubt that was partly reflecting what is an acute shortage of housing, but we would hope that ... over the next three to five years, the recognition of the problem will result in some additional housing stock coming on line.

"If that doesn't happen, then you will see very large increases in house prices, but we're of the view that you're probably not going to see really large growth in prices over the next three years or so because we will slowing be (boosting) that supply."

In the short term, higher interest rates meant the housing shortage was probably going to become more acute before starts to turn around.

"But if you're looking at it from a medium-term perspective where there are national housing policies on the table that in time will boost the supply of housing, then we would hope that by the end of this decade ... we would be reducing some of the upward pressure on established house prices."


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