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Rapid Price Growth Due to Supply Shortage

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The Reserve Bank says housing market risks to banks have faded as big-city prices rebound, but says rapid price growth could re-emerge as a result of possible supply shortages. The RBA has highlighted the challenge it faces in housing in its six-month review of the financial system. While the market rebound has placed banks and many households in a better position, if rates spike sharply, the RBA will also highlight the potential for future challenges.

After four months of rising house prices in Sydney and Melbourne, the RBA says banks are less exposed to large numbers of customers falling into negative equity. Risks related to the housing market have receded somewhat as housing market conditions in Sydney and Melbourne have improved. After declining for more than a year, housing prices in Sydney and Melbourne increased over the four months to September and auction clearance rates have picked up.

In contrast to Sydney and Melbourne, housing prices in Western Australia and the Northern Territory have continued their prolonged decline. In Perth, housing prices are around 20 percent lower than their 2014 peak and in some parts of regional Western Australia, housing prices have fallen by more than 10 percent over the past six months. Housing demand in Western Australia has been weighed down by low population growth and ongoing weakness in macroeconomic conditions. Conditions in most other capital cities and regional areas are generally subdued. Overall, these housing markets did not experience the earlier price declines seen in Sydney and Melbourne, and prices are generally close to their 2018 peaks.

But after dramatic declines in approval for potential building construction, the central bank has highlighted the long-term threat of a future housing shortage, which can spark rapid price growth down the track.“With population growth projected to remain strong, ongoing weakness in building approvals would likely result in a shortage of new housing in several years with a resulting risk of rapid growth in prices that would stimulate stronger debt growth,” it says.

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