To fix Canberra's falling house prices the ACT government has to consider more than just supply

Inflation is now almost 8 per cent meaning more rates rises. This is a long way away from the Reserve Bank's target inflation range of 2-3 per cent. Things are looking grim.

And the Australian Bureau of Statistics tells us that the average mortgage size (for owner occupiers) in the ACT in November 2022 is now $636,749. This compares to $520,916 in Jan 2020. The RBA has lifted rates by 3 per cent since May 2022 and bond markets are factoring at least a further two rate rises to a total of 3.5 per cent.

So let's do the maths - an increase in your mortgage rates by 3.5 per cent on an average mortgage of $636,749 is $22,286 extra to your interest payments over a year.

Your mortgage payments have gone up by $22,000 if you have the average owner occupier mortgage but if you have a million-dollar mortgage, the increase will be $35,000 a year.

Falling prices is eating into your home equity, and if you bought recently with a minimal deposit you will be potentially in negative equity territory i.e. your house is worth less than the debt you owe.

Have an investment property too? Or a house down the coast bought in the good times as the market boomed? Factor those additional interest costs in as well.

And now imagine if you are not only switching from low fixed rates to higher variable rates but also switching from interest only to principal and interest - your household cashflow budget will have been smashed to pieces.

How will households react? Will you sell your property and rent?

According to Domain data the rental vacancy rate in Canberra is 1.2 per cent, still well below long term vacancy rates of 2-3 per cent. Rents increased by 7.3 per cent over the last 12 months in Canberra according to the SQM Research Weekly Rents Index. And there is an influx of foreign students currently returning to our universities that will make renting even more challenging.

It is arguably not the best time to be switching from owning to renting.

Of course the interplay between home ownership markets and housing rental markets on the margin is not as simple as individuals and families shift from renting to owning and vice versa. Households change and shift all the time for a wide variety of reasons. For example, people couch surfing through to young adults partnering up and moving out of their respective family homes or single rental. The last census results also showed the proportion of single person households has increased again further compounding the demand supply imbalance. On the margin, household formation changes have a material impact on the available supply of housing.

It is a constant and logical argument that the solution is more supply. However, with expensive land and high construction costs (for now), the economic conditions facing the private sector are too adverse to expect private investment in more supply in the short term.

So where can more supply of dwellings come from?

The ACT government is often criticised for not releasing enough land for detached housing. And when markets contract like they are now, land can often sit unsold as it did pre-pandemic.

At the same time, the SLA is required to sell at or above market valuation.

ACT government land pricing needs to be dynamic to respond to weaker markets and drop prices to help make construction viable. Valuer instructions to determine market valuation needs to be expanded to use comparables beyond the ACT to nearby estates like Googong for per square metre comparables that are not distorted by ACT government monopoly land release strategies. This will ensure that land prices actually do drop in response to changes in market conditions and on the margin, help create the conditions for construction of new supply.

As I have suggested in other articles, land can be "gifted" to community housing providers via land title transfer to deliver community housing - affordable and social housing. This boosts supply but does not distort the rental market

The impact of the Green's changes to the Residential Tenancy ACT on the rental market, where they are mandating increases in dwelling energy efficiency, remains to be seen.

While it is admirable goal to lift households out of fuel poverty, the economist in me would like to see landlords incentivised rather than penalised to achieve the same outcome rather than potentially driving rental stock from the market which will further exacerbate rental challenges.

This suggestion won't boost the supply of rental dwellings but it would reduce the risk to the rental market posed by the changes to the Residential Tenancy Act (if the government's own "listening report" is to be listened to).

As the market contracts, Housing ACT ramping up construction to stimulate construction activity and jobs in addition to boosting supply is an obvious thing to suggest. However in a rising interest rates environment, the state of the ACT government's debt and deficit means this likely is not feasible.

The election campaign has covertly begun over Christmas with a very welcome 34 per cent pay rise over 3 years for lower paid ACT public servants and a massive $25 million contract signed for media services with global giant Universal McCann by the ACT government. Let's hope there is something in the election kit bags of all parties that increases land supply and supports the most marginal in our community through what could be very tough times ahead.