Housing costs are the largest and most persistent contributor to inflation, yet the primary tool used to fight inflation, higher interest rates, directly restricts the supply of new homes.

This is inflation driven by housing scarcity.

Rents, new home construction costs and related housing services are keeping inflation elevated. These pressures reflect a prolonged shortfall in housing supply relative to population growth and household formation.

When inflation is driven by supply constraints, higher interest rates do not solve the problem, they actively intensify it.

Higher rates raise the cost of borrowing, reduce the number of new homes coming to market, further inflating prices and rents, keeping inflation elevated for longer. At the same time, higher interest rates will slow business activity, create unemployment and worsen economic and social outcomes. This cost would weigh heavily on those least able to afford it.

This creates a self-reinforcing cycle. Housing shortages lift inflation, higher rates suppress new supply and inflation persists. It is the economic equivalent of the Oozlum bird, flying in ever tighter circles while chasing its own tail.

Housing is a binding macroeconomic constraint. It is influencing inflation persistence, labour mobility, productivity growth and fiscal pressures across the economy.

Fixing housing driven inflation does not require creating unemployment across the rest of the economy. 

Measures that reduce taxes embedded in new housing and accelerate delivery can ease inflation by expanding supply. This approach tackles inflation at its source, rather than suppressing activity elsewhere in the economy.

Australia does not need to fly faster in circles. It needs to make it easier and cheaper to build homes to flight higher interest rates.

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