Oh dear, has the Rudd Government stampeded the horses at the Reserve Bank with its new affordable housing policy?

The federal government has doubled its affordable rental home scheme from 50,000 over five years to a 100,000 home target that would continue after the first five years. The ALP promised last year to set up a National Rental Affordability Scheme, funding tax incentives for investors to build up to 50,000 low-cost rental properties.

Prime Minister Kevin Rudd announced the doubling of the target yesterday after the viewer friendly community cabinet in Brisbane. But there are a few sums to be done here to explain why it’s probably not what the RBA, which has its itchy finger on the interest rate anti-inflation trigger, would want to hear.

Australia is currently building around 150,000 homes a year, when the real demand is 175,000-180,000 annually. Around 185,000-190,000 new homes a year would have to be built for at least five years to have an impact on rents and prices. In those five years, around 750,000 to 800,000 homes will be built (allowing for a slight rise, although that won’t happen this year with rates rising).

To meet demand, that 175,000 figure would have to rise by at least 2-5% a year to close to 200,000 houses at the end of the five years. Population is rising by around 2%-3% a year thanks to a rising birth rate and immigration. To have a genuine downward push on prices and rent, the 185,000 figure would have to rise to around 210-220,000 a year by year five.

At best the Rudd scheme won’t start until well into next year, with the first houses appearing in 2010, so it won’t have any impact on housing levels until then. Also, the 50,000 for the first five years will take the edge off the gap between output and actual demand, but do nothing to reduce it; over the longer period, it won’t have much of an impact at all.

And then there’s the plan to import 15,000 building workers, mainly from the depressed US housing sector, over three years. Firstly there’s a skills problem. Most US homes are built differently: there’s far less brick used, more wood and fibre cement products.

The extra 5,000 people a year would add to the current record level of immigration and it’s immigration, more than anything, that’s pushing up rents and home prices.

And that brings us to the RBA. At the moment it is more concerned about inflation and the shortage of labour and productive capacity in the economy. These shortages are being exacerbated by the resources boom in Western Australia, Queensland, parts of the Northern territory, NSW and South Australia.

The last thing the RBA would want to see is an upsurge in demand for labour and building materials across the country for the new affordable homes programs. Importing 5,000 workers a year won’t make much of a difference.

Peter Fray

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