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For many years, one of the fundamental factors cited as a driver of Australia's persistently high and rising house prices has been a shortage of supply of new dwellings relative to strong growth in demand.
The story, which I think is correct, was that Australia had experienced an extended period of very rapid population growth driven by both natural increase and, more importantly, strong immigration inflows. This has driven ongoing demand for new houses, whether the additional Australians are buyers or renters, the new demand is there.
While this unrelenting source of demand has been unfolding, there has been a simultaneous under-building of new dwellings for a range of reasons, which for the purposes of this article are not all that important. Suffice to say, in the period from around 2005 to 2013, there were simply not enough new dwellings being built to match the growth in demand.
With the December quarter inflation data out of the way, the only thing standing in the way of an interest rate cut at next week's RBA Board meeting is its own pig-headedness and its crazed obsession with Sydney house prices.
The December quarter CPI confirmed a further marked fall in inflation – the headline rate fell to just 1.7 per cent, the lowest annual reading since March 2012, and the quarterly momentum pointing to yet lower inflation in the next quarter or two. It was below the market forecast. it is only the fifth time since 2000 (that's 56 quarters) that inflation has been below 2 per cent. The underlying measures were also soft, with the annual increase at just 2.2 per cent, well down on the 2.8 per cent recorded in the June quarter 2014 and spot on the market forecast. The annual underlying inflation rate is now just 0.4 percentage points from being at a new record low. In the last decade, the annual underlying inflation rate has been lower than the December quarter 2014 reading of 2.2 per cent on just two occasions.
Whichever way the CPI data are cut and diced, inflation is low.