Investment needed to quell immigration inflation risks: Lowe

Philip Lowe has warned stronger-than-expected migration needs to be met with greater levels of investment in housing to avoid a spike in inflation.

The Governor of the Reserve Bank of Australia Philip Lowe speaks during the Economic Society of Australia lunch held in Brisbane. Picture: NCA NewsWire/Tertius Pickard

Reserve Bank governor Philip Lowe has warned stronger-than-expected migration needs to be met with greater levels of investment in housing to avoid a spike in inflation.

Speaking in Brisbane on Wednesday, Dr Lowe said that while some sectors, such as hospitality, are benefiting from an easing of labour shortages, the inflow of more than 400,000 migrants into the country is creating stronger competition in housing markets.

“All these people coming in have to live somewhere,” Dr Lowe said

“That is pushing up rents and housing prices. We thought housing prices would continue to decline this year but they are not, in Sydney, they rising quite strongly again and that is partly to the influx of immigration.”

House prices are expected to continue rebounding through the remainder of 2023. Picture: NCA NewsWire / Simon Bullard

Dr Lowe said migration does not have a direct impact on interest rates decisions, but he noted the need for more investment into growing the country to ensure the country is aptly supported, calling out Australia’s housing shortage.

“If we‘re going to have a lot more people in the country, which is good, we need the capital stock to support those people, otherwise, the capital/labour ratio declines and that is bad for productivity,” he said.

“Population growth brings huge advantages to the country, but we need governments and businesses to keep investing to build a capital stock to support a stronger population.

“It is a broader issue than just the short-term inflation outlook it is how we build the capital stock to support a larger or diverse population which I think is in long-term interest.”

Property prices rose each month through the first half of 2023 and are now on track to reach new highs as early as January. Meanwhile, rental markets have demonstrated some signs of easing, however, vacancy rates nationally are less than 1.5 per cent.

The trajectory of the housing market defied economist predictions of significant falls as interest rates rose to their highest level in more than a decade in little over a year.

Dr Lowe said telling the Australians rates were unlikely to move until 2024 was the right thing to do against the backdrop of the pandemic, as certainly was needed at the time.

“What we are trying to do without communications is to tell people what we are doing, why we are doing it, the facts we are taking into account,” he said.

“During the pandemic, we had a different approach because, at the time, we thought we were in truly dire circumstances. We were explicit about what we thought was the path to interest rates and it turned out we were wrong.”