Housing poses threat to economy

Although it faces some challenges, Australia's economy is benefiting from decades of reform.

SYDNEY - Australia's economic future will be challenged by an under-supply of capacity and housing, despite decades of economic reform shielding the country from the worst of the global downturn, the Reserve Bank of Australia (RBA) says.

The nation is entering a new phase of economic expansion with less spare capacity than was thought likely, with unemployment appearing to have peaked at about 5.8 per cent, says RBA assistant governor Philip Lowe.

"The issues we face are, therefore, quite different from those confronting most of the other advanced economies," Lowe told the Urban Development Institute of Australia National Congress yesterday.

"Elsewhere, the challenge is to get private demand to grow on a sustainable basis so it can catch up with the supply potential of the economy. In contrast, for Australia, the main task is to expand the supply side of the economy so demand can grow solidly without causing inflation to rise."

Australia also faced an under-supply of housing that wasn't meeting the demands of a growing population.

It was likely to devote a higher share of its GDP to housing than had been the case historically, or risk a further adjustment in housing prices and rents to balance supply and demand.

Unlike most countries hit by the crisis, Australia did not have an unsustainable surge in dwelling investment in the mid-2000s resulting in over-supply of housing, Lowe said.

He said the rate of rise in dwellings had been below the average of the past 50 years, while population had risen at its fastest pace over the same period.

"If we are to build more dwellings, we need to ensure planning guidelines and infrastructure provision can accommodate this."

A second challenge was "the capacity of the economy to deal with an increase in dwelling construction at a time when investment elsewhere in the economy is also very high".

"If housing construction is very strong at the same time that the resources sector is expanding, there will be competing demands for a range of skilled workers and specialised services," Lowe said.

"Managing these competing demands and ensuring the adequate supply of workers with appropriate skills will be a challenge."

While challenges remained, three decades of reform by Governments and business had honed the Australian economy to weather not just the global financial crisis of 2008, but the 1997 Asian financial crisis.

He said the central lesson of the past 18 months was the importance of flexibility in the economy and economic policy to respond to crisis.

The RBA slashed interest rates from 7.5 per cent to a 50-year low of 3 per cent over seven months between September 2008 and last April in response to the international debt crisis. Since then, it has raised the cash rate to 4 per cent in a series of moves that began last October.

"This flexibility, though, did not just materialise out of thin air," Lowe said. "Instead, it was the result of many years of policy reform and hard work by Governments and business."

Lowe said business investment was about 16 per cent of GNP, close to a 40-year peak, and was expected to rise over the next two years.

- AAP