A decline in house building across Australia will translate into rapid rent rises in all major cities according to economic forecaster BIS Shrapnel.

It quotes a decline in building commencements of 4% in 2007/08 as dwelling construction remains weak. This figure includes a 1% reduction in national housing starts meaning around 148,000 dwellings will be built this year.

This decline, at a time when underlying demand for new dwellings is around the 170,000 mark, means inevitable pressure on rental markets, says the forecaster.

Jason Anderson, senior project manager at BIS Shrapnel, said: "In 2007/08 national dwelling starts will be below underlying demand for the fourth consecutive year. As a result, rental markets are now extremely tight in all capital cities, which will lead to further strong growth in residential rents."

Anderson warns that many cities will struggle to cope with the net overseas migration that is supporting Australia's strong employment growth. He believes temporary workers in particular will struggle to find somewhere affordable to live as the tight rental markets persist and squeeze up rents.

He said: "The focus for government policy must shift to the inadequate supply of new housing, as the wider economic and social problems stemming from the dwelling undersupply have only begun to develop."

The data predicts that the rental market in NSW will remain tight for the rest of the decade as dwelling commencements recover from a 30-year low in 2006/07. 

Victoria is currently faring better, but will suffer an 11% reduction in commencements in 2007/08. Queensland building activity has been very strong, rising 40% in the past five years according to the data and is tipped to stay strong for the next few years.

Western Australia is set to see a 21% drop in house building in 2007/08 due to poor affordability.