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The Reserve Bank has a fairly bleak message for those struggling with housing costs — there won't be a quick fix to affordability problems.
However, RBA assistant governor (economic) Sarah Hunter said there are some signs that the worst of the downturn in housing supply may soon be behind us.
"We are hearing reports from our liaison program that some developers can see the strength in underlying demand and expect to respond with new supply (although it is early days)," she told an audience of real estate agents at a conference in Hobart.
"Federal and state government initiatives that streamline the approvals and build process will also reduce costs, which will ultimately lift supply.
"But it will not be a quick fix. Demand pressure, and so upward pressure on rents and prices, will remain until new supply comes online.
"We expect this response to take some time to materialise, given the current level of new dwelling approvals and the information from liaison that many projects are still not viable. In the meantime, we expect residential construction activity to remain relatively subdued."
Ms Hunter did note that there are some ways demand is adjusting to the housing shortage and higher prices, which would start putting downward pressure on rents in particular.
"Average household size could increase (which would reduce demand, for a given population size) and the pace of growth in construction costs could moderate," she said.
"These responses will work towards rebalancing the market and resolve the current squeeze."
Falling household size boosts housing demand
Aside from record levels of immigration, the other key driver of demand has been a reduction in average household size due to demographics (and aging population and smaller families), the trend towards more space for working from home, and fewer share houses.
"The average number of people living in each household has trended lower, from around 2.8 in the mid-1980s to around 2.5 of late," Ms Hunter observed.
"This may sound like a small change but if, for some reason, average household size rose back to 2.8, we would need 1.2 million fewer dwellings to house our current population – no small difference."
However, the RBA's chief economist said the demographic and work-from-home drivers of reduced household sizes appear unlikely to reverse.
"This suggests that the recent falls in the average number of people per home will be at least partially permanent," she added.
Rate rises not pushing up rents: RBA
Ms Hunter also refuted suggestions that interest rate rises themselves were a significant contributor to housing inflation.
"Our preliminary analysis suggests that market conditions (captured via the vacancy rate) explain most of the movement in market rents, and there is little to no evidence of direct pass through to rents from higher interest costs in the short term," she argued.
"The observation that market rents and interest rates move together appears to be a case of correlation, rather than interest rate rises causing rents to increase."
However, she did acknowledge that higher interest rates are likely to be exacerbating the housing shortage.
"Some market participants have delayed projects or decided not to begin because of the relatively high cost of building when compared with the project's returns," she noted.
"Many dwelling construction projects are funded by debt, and so higher interest costs will dampen the flow of new housing supply."
Ms Hunter said the future of Australia's housing market is a critical issue.
"The housing sector sits at the heart of the economy," Ms Hunter said.
"Everyone needs a place to live and finding suitable housing is fundamental to people's quality of life."