When the Consumer Price Index figures for the September quarter are released on Wednesday look for a fair bit of discussion about the impact of rising rents, interest rates and the impact of falling home affordability, on the level of prices.
By some calculations, housing costs, which include rents, are now probably the single largest influence on the CPI: that was the case in the June quarter.
Its a combination of factors: interest rates of course are a major one, along with rents: but also consider elements such as the very high level of migration into Australia: with the number of all long term (longer than a year) arrivals, playing a big part in lifting demand.
This migration is coming from New Zealand (our single largest source of new migrants), so-called 'guest' workers, refugees and general migration (which is dominated by business migrants).
Another driver is the shortfall between actual output of new homes (housing starts) and the level of demand: its been widening for the past few years because of the sluggish nature of the housing markets in the two biggest states, NSW and Victoria.
Housing affordability is an election issue, but don't expect anything to be done quickly (apart from the hot air of promise) quickly. The situation is going to worsen, not get better. State and local government policies and charges play a part in driving up costs and restricting land release, but the high levels of migration are a significant contributor.
The Reserve Bank often talks about a shortage of resources and wondering whether the economy is near capacity.
The housing crisis says it is, not because there is a boom; far from it. The surplus capacity in housing can't be filled because there's not enough land available, and if there was there wouldn't be enough workers and resources to allow full capacity to be eyed by home builders, financiers and potential customers. There are shortages.
As well the rush to bring in tens of thousands of temporary workers a year is putting upward pressure on rental costs and demand generally, adding to the strains on capacity. It seems to be a never-ending circle.
Leading business forecast, BIS Shrapnel says it's getting worse for housing, with the gap between the real level of demand and actual construction widening.
In a report released this morning the firm says that the situation is worsening with the country's annual new housing needs now at a new record high of 182,000 dwellings a year, around 20% substantially above the 151,000 new dwellings actually commenced in 2006/07.
BIS Shrapnel says the low rate of dwelling construction relative to underlying demand "has now become a factor in the outlook for inflation and interest rates."
"With rental markets tightening, growth in average rentals is accelerating in all capital cities and Anderson expects this trend will continue into 2007/08, adding further pressure to inflation."
The expansion in housing needs is largely due to the new heights being registered for net overseas migration, explained Anderson. BIS Shrapnel forecasts Australia's population gain from net overseas migration will reach 185,000 persons in 2007/08 — the highest annual inflow on record.
This inflow comprises both permanent migrants and long-term visitors (workers and students). During the next five years, more than half of Australia's population increase will come from overseas migration (up from 39% during the 1990s).
"We believe continued strong employment growth will depend on a high population inflow from other countries," said Anderson.
"This means the provision of an adequate supply of housing is a key contributing factor to Australia's long-term economic growth. In particular, with the number of long-term visitors running at a very high level, there is an increasing demand for rental housing."
Anderson says the current rate of residential construction is substantially below underlying demand.
"There were 151,000 national dwelling commencements in 2006/07, and BIS Shrapnel forecasts a similar level of commencements for 2007/08 contributing to a greater deficiency of dwellings. The deficiency is forecast to reach about 100,000 dwellings by June 2008, which would equate to eight months of construction.
"The undersupply of housing is leading to an acceleration in rents. As housing rentals are a component of the CPI (comprising 5.3 per cent of the index), this trend is putting upward pressure on inflation."
BIS Shrapnel expects this pressure will grow over the course of 2007/08.
National average rentals increased by 3% over the year to June 2006, with the growth rate picking up to 5.2% in the year to June 2007 (as measured by the rental index component of the CPI). BIS Shrapnel forecasts the Australian Bureau of Statistics (ABS) rental index will show an increase of 8.4% over the year to June 2008.
This forecast would contribute an extra 0.2% to the inflation rate by June 2008. "Given the current underlying measures of inflation are high relative to the Reserve Bank of Australia target range, we expect the shortage of rental properties will be a significant factor contributing to a further interest rate rise in the next six months," said Anderson.
BIS Shrapnel forecasts an interest rate rise in March quarter 2008, but also considers that there is some chance the CPI result on Wednesday, October 24, will be high enough to cause a rate rise in November 2007.
A further interest rate rise would stifle the recovery in dwelling commencements in 2008 and extend the pressure on average rentals.
The firm says this raises a dilemma for the Reserve Bank of Australia (RBA). "The RBA is expected to raise the cash rate to quell demand-inflationary pressures, stemming from strong growth in con
