(And while the delay in Queensland's coal mines getting back to speed and softer-than-expected public spending were keys factors in growth not being as strong as the RBA forecast a year ago, the bank did give itself a pat on the back for getting private demand and gross national expenditure forecasts about right. Two out of three ain't bad, according to Meatloaf - and the RBA and Treasury forecasts for the unemployment rate for 2011-12 erred on the side of being too pessimistic.) Given Australia's under-building of housing, the residential construction industry's weakness has been long been a matter of puzzlement and conjecture. Relief not near Before the GFC focused the RBA's attention more urgently elsewhere, our central bank regularly railed against the various government policies that have helped make housing more expensive than it should be. The latest quarterly statement suggests state governments are showing some signs of trying to improve their housing performance, but relief remains some way off: “The near-term outlook for residential building activity has been revised lower, with recent data suggesting that there are few signs of an imminent turnaround in demand,” the central bank warns.

The anonymous industry heavies the RBA consults gave three main reasons for that: “Poor sentiment regarding job security, notwithstanding recent low levels of unemployment; softness in established housing markets, consistent with expectations of flat or declining house prices; and relatively tight credit conditions for developers. “It is expected that residential building activity will in time pick up, as lower purchase costs, higher rental yields, population growth and pent-up demand following an extended period of weak growth in building activity combine.” The RBA statement suggests the housing industry is undergoing its share of restructuring along with the rest of the economy. Rental view From an investor's point of view, there's a hint or two that the way ahead will be more about rental income than the reliance on capital growth that fuelled the landlord class explosion over the past couple of decades. In another part of the statement, the mandarins observe:

“The slower growth in housing debt has been associated with weakness in the housing market. Weak demand has been reflected in a fall in Australian capital city dwelling prices of around 6 per cent since their peak in early 2011 and low housing turnover. Notwithstanding this, it appears that in recent months dwelling prices might have been declining at a slower rate. With declines in dwelling prices, the ratio of dwelling prices to income is back around its 2002 level. “In contrast to dwelling prices, the various measures of rents grew by 4 to 5 per cent over the year. Reasonably strong rental growth, together with falling dwelling prices, has lifted rental yields to around ½ percentage point above their mid-2000s level. Rental vacancy rates have been around 2 per cent since 2009, above the very low levels seen in 2006–2008 but still low by historical standards.” Planning lags With residential building activity down around the lows of some earlier cycles, the RBA has another crack at government policies: “The weakness in residential building activity reflects a number of factors. According to liaison, declines in established dwelling prices have made households reluctant to commit to new contracts to build. Also, in recent years, the lengthy planning processes and arrangements for infrastructure provision have increased the cost of new dwellings.”

The bank gives state governments some credit for trying to address those issues, but the local and federal government policies that damage housing affordability pass unmentioned, with the immediate outlook remaining poor: “Despite recent decreases in housing prices relative to income and increased rental yields, forward-looking indicators suggest that there is little prospect of an imminent recovery in housing construction. Approvals for new dwellings have continued to trend downwards in early 2012, especially for higher-density housing.” Rate cut illusions It looks like the RBA itself is under no illusions about the odd interest rate cut sparking a sudden rival, unlike some spruikers about the place. That RBA view was preceded by similar opinion from property commentator Michael Matusik, although in stronger language than central bankers use.

“Over the last decade or so the connection between cheaper money and house market improvement has been broken,” wrote Matusik. “And unless action is taken, then this circuit might be broken for good. “In short, residential property, and especially new stock, is taxed way too much and there have been far too many government-induced grants and incentives, such as building boosts & first home buyer grants. These have distorted the more normal property cycle, inflated demand and prices and have made the housing market far more cyclical than it used to be. “Despite mortgage rates falling by close to 1.5% over the past two or so years, new housing starts have continued to decline," Mr Matusik said. Cutting taxes In short, increasing population growth and making more so-called greenfield sites available are the only two things he sees as lifting new housing starts.

As part of latter efforts, cutting taxes will be crucial, he says. “Work by the HIA shows that the total tax-take from new housing can be as much as 40 per cent of the final price of a new home, Mr Matusik wrote. "New housing is the second-most heavily taxed business sector in Australia, and yet it still contributes almost $40 billion in tax revenue each year. And regrettably, it's the new home buyer who pays.” Loading Reduce taxation? When the federal and state governments have signed up for surplus worship and aren't game to touch the logical alternatives to the present raft of housing taxes? Looks like there's little threat of that.

Michael Pascoe is a BusinessDay contributing editor.