By Jane Wardell
SYDNEY, Oct 30 (Reuters) - At the Ingleburn Gardens Estateon the outskirts of Sydney, an upmarket housing developmentcomplete with pool, concierge, onsite shop and children'splayground, the landscaped grounds are marred by large tracts ofundeveloped land.
Despite huge demand for housing in the area, just fivestages of the 10-stage, 580-house project have been completedmore than 20 years after Monarch Investments bought the site.
As eager buyers, emboldened by record low interest rates,spark a surge in Australian house prices, developers andanalysts say the real problem is at the other end of the market.
In one of the most sparsely populated countries on earth,finding somewhere to build new homes is a huge struggle.
"There is no bubble," said Peter Icklow, Monarch managingdirector. "There's insufficient supply of affordable housing;it's simply not viable to build new housing."
Developers face a swathe of obstacles including prohibitivetaxes on new builds, a refusal by banks to lend funds,notoriously tight and slow planning permission proceduresthrough local government and a lack of roads and railinfrastructure to make projects financially viable.
The natural environment, such as the national parkssurrounding Sydney, is also a barrier.
The shortage in new housing sets Australia apart from othercountries, such as the United States, Canada and Britain, wherethere are also fears of a property price bubble amid aresurgence in demand.
Economists say the upturn in housing market activity followsan unusually extended period of subdued sales during the globalfinancial crisis, while the central bank dismisses bubble talkas "unrealistically alarmist".
Australia hasn't experienced a property market crash sincethe 1890s despite being one of the most expensive countriesrelative to wages to own a home, according to commercial datacollector Residex.
Still, domestic house prices surged 5.8 percent over theyear to mid-September as buyers responded to a series of ratecuts by the Reserve Bank of Australia, delivered to soften theblow from a tail-off in the country's mining investment boom. In Sydney, prices rose 8.2 percent, according to RPData-Rismark, pushing the capital cities index to a record high.
Worringly for policymakers, housing construction - a majordriver of the economy, affecting employment, credit growth andretail spending - has been slower to respond to price rises thanthe central bank had expected.
The Australian Bureau of Statistics said this month thathousing starts, or the commencement of construction, rose 11.2percent in the year to the end of September, following twoconsecutive yearly declines.
In the country's capital, Canberra, developer Doma Grouprecently purchased a site to build up to 120 houses, its fifthdevelopment in a major urban regeneration project on theforeshores of Lake Burley Griffin.
Andrew Stewart, regional managing director of real estatefirm CBRE, who marketed the site, said he received numerousenquiries.
But a closer read of the housing starts data showed all ofthe growth, itself from a very low base, occurred in the firsthalf of the year and was unevenly distributed.
While new build starts in the Australian Capital Territory,encompassing Canberra, were up a huge 107 percent in September,they were down 8 percent in New South Wales, the country's mostpopulous state.
Total dwelling approvals, seasonally adjusted, sank by 4.7percent in August after a strong 10.2 percent rise the previousmonth, according to the Australian Bureau of Statistics. While the measure is a volatile one, analysts will be watchingclosely when the data for September is released on Thursday.
Phil Chronican, the Australia CEO of Australia and NewZealand Banking Group, agrees with the RBA that concernabout a house price bubble is overstated, but warns the marketneeds to meet buyer demand with construction.
"To stop this demand exacerbating the rising price trendsthough, we need to see a supply response," Chronican said in arecent speech to business leaders. "We need more houses andapartments."
Monarch's Icklow and other developers say they would dearlylove to comply, but their hands are tied.
Icklow said sales taxes on new builds make them lesscompetitive with existing houses and units, while banks aretightening up lending for projects off the plan.
"The current regulatory and taxation environment combinedwith ever tightening credit conditions for residentialdevelopment significantly dilutes the chances of a broad basedrecovery in housing starts," said Harley Dale, chief economistof the Housing Industry Association.
The HIA forecasts a shortfall in dwellings of around 466,00by 2020, equivalent to around 40 months of housing construction.
Some economists say Australia should take its cue from itssmaller neighbour, New Zealand, where the central bank is takingearly steps to prevent overheating following a 10 percent surgein house prices over the past year by introducing limits onleveraged lending.
As well as introducing a 10/80 rule, where only 10 percentof new mortgages written can have loan to valuation ratios ofmore than 80 percent, it is streamlining approval processes toboost the number of new homes in Auckland, the country's biggestcity.
Investors are already pricing in expectations of a rise inconstruction activity.
Stocks in the building firms sector, which includes Stockland Corp Ltd, Mirvac Group and LendLease Corp, have gained an average of 15 percent overthe past three months.
In the construction materials sector, which includes JamesHardie Industries Ltd and Boral Ltd, shareshave risen by an average of 6.3 percent over the same period.
But the companies themselves aren't so optimistic.
One difficulty is that the recent weakness in the market hasled many of the major builders and building products companiesto cut jobs, reduce or even close operations.
At the same time, a fall in the Australian dollar has pushedup the price of key building materials such as imported timber.
Those factors are likely to increase costs for developersand further lengthen the lag between house price rises andresurgent building activity.
Boral Ltd, which has cut brick and roof tile production byclosing and mothballing plants, said this month it expectedactivity in Australia to be "broadly flat" in fiscal year 2014.
"There has been no noticeable improvement in volumes sincethe new financial year began and our prognosis for the year isfor relatively flat conditions," Fletcher Building Chairman Ralph Waters told shareholders at the company's annualgeneral meeting this month.
- Budget, Tax & Economy
- Interest Rates
- Reserve Bank of Australia
- housing starts