(Bloomberg) -- Australia’s central bank is “closely watching” how the current supply-demand mismatch in the housing market unwinds, while warning “it will not be a quick fix,” Assistant Governor Sarah Hunter said on Thursday. 

“Demand pressure, and so upward pressure on rents and prices, will remain until new supply comes online,” Hunter said in a speech in Hobart, Tasmania. “We expect this response to take some time to materialize, given the current level of new dwelling approvals and the information from liaison that many projects are still not viable.”

Australia is facing its worst housing crisis in living memory. Residential building permits per capita are sitting at decade-low levels and there remains a sizable backlog of construction work, largely due to a lack of skilled workers. The government tried to plug a labor supply gap by boosting the number of migrants, only to find that this exacerbated the problem. 

The impact of the supply-demand imbalance is visible in both the rental and established housing markets — median rents in Australia hit a record high in April while home prices have been rising despite borrowing costs standing at a 12-year-high of 4.35%. 

Soaring costs in the wake of the pandemic also pushed a number of builders with fixed-price contracts into bankruptcy.

Economists expect the RBA will leave its cash rate at current levels until November while money money markets are only fully pricing a first cut next year. 

Hunter didn’t comment on monetary policy in her address to the Real Estate Institute of Australia Centennial Congress.

Potential avenues for resolving the imbalances in the housing market include:

  • Average household sizes could increase
  • The pace of growth in construction costs could moderate
  • The RBA’s liaison program shows some developers are seeing strength in underlying demand and expect to respond with new supply

The RBA’s current assessment is that residential construction activity will remain relatively subdued with dwelling completions trending down, Hunter said.

“The last couple of years has seen a perfect storm of constraints on activity,” she said.

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