Rising rental yields to draw investors back into housing market: RBA deputy governor Philip Lowe

Low rental vacancy rates, rising rents and eventually rising rental yields are expected to draw property investors back to the housing market and increase the supply of new housing, RBA deputy governor Philip Lowe has said following a speech in Hobart this week.

Lowe also said that the need for stronger housing and non-resource investment suggested the bias remains for interest rates to be lower to support ongoing jobs growth.

He acknowledged that construction remained one of the weakest sectors in the economy, particularly the residential construction sector, with an estimated 70,000 jobs lost in the past year.

Lowe made this observation while answering questions during a Q&A session following a speech on structural changes in the labour market as part of a Financial Services Institute of Australaisa (FINSIA) event.

In its wrap of the Q&A session, ANZ reported that Lowe “did not appear overly worried about relatively low interest rates reigniting a housing boom given household appetite for debt is relatively low, although the RBA will continue to monitor the housing market closely”.

Lowe said that despite the unemployment rate remaining between 5% and 5.25% over the last two years the labour market had weakened in the past months, with only modest aggregate employment growth, a decline in average hours worked, and a decline in the employment-to-population ratio.

He said the softer global outlook and this weaker labour market, combined with a contained inflation outlook, was behind the RBA’s October decision to set monetary policy to be “a little more accommodative than it had been”.

In his speech Lowe acknowledged that the RBA has to focus on “aggregate outcomes” but said the bank also tried to understand “what is going on beneath these aggregates, and how people's lives are being affected”.

In this regard he noted that the construction sector is one two industries (the other being public administration) that stand out as having “particularly weak employment growth over recent times.

“According to the ABS, there has been a net decline in [construction] employment of 70,000 over the past 12 months.

“Activity in important parts of the industry – including in house building and commercial construction – remains subdued, as does the immediate outlook, and this has led to a fair amount of job shedding,’” he said.

Lowe also said there was a possible link between the decline in employment participation and recent fall in demand for construction workers.

“There has been a large decline in the number of people who identify themselves as being self-employed and many of these worked in the construction industry.

“This weakness in the construction sector, particularly of new homes, has been one of the bigger surprises in the economic outcomes over recent times. Looking forward, a pick-up in construction activity is one of the factors that could provide an offset to the eventual moderation in the current very high level of investment in the resources sector. A pick-up in other forms of investment could also play this role.”