Residential recovery could be defeated by rising interest rates

Insufficient building is leading to a tightening of rental markets and strongly rising rents. This is much the same as in commercial property markets.

This is not a good space for housing markets under supplied yet still remaining weak.

Will there be a collapse in prices? No. Both prices and construction are soft now. But the outlook is for a slow build-up, picking up pace next year, albeit slowed by interest rate rises, and peaking prematurely in three years’ time as interest rates bite.

At the bread-and-butter end, the outlook for housing investment is solid but not spectacular. And the upswing will be of limited duration. There are better investments in the commercial sector. But there remain bargains amongst higher-value housing and holiday homes.

This cycle is locked in. And at the end of it, the problem of undersupply will remain. In the next cycle, if we want to keep housing reasonably available and affordable, the real issue will be to work out how to increase building without substantially increasing prices.

Frank Gelber is a director and chief economist for BIS Shrapnel.