By Jill Fraser for Lending Central

Just when things were starting to look up (certainly from where I sit they were – we survived the GFC, employment and consumer confidence are picking up, competition is returning to the mortgage industry, the media is using the word ethics and broker in one sentence and housing prices are simmering along) a dark grey cloud descends over our future.

First we have Four Corners telling us on Monday night that the greatest financial crisis we will ever see is yet to come (the prediction being that many countries will see their debt reach 100 per cent of their Gross Domestic Product in the days to come) and now BIS Shrapnel has released a long term forecast that warns of high inflation and interest rates that top 9 per cent.

Leading industry analyst and economic forecaster, BIS Shrapnel says whoever forms Government will confront a sluggish economy with no real growth drivers over the next few years.

The report looks to high inflation and rising interest rates together with a corresponding housing shortage seeding dark economic clouds looming in the long-term despite an anticipated medium to short-term acceleration.

BIS Shrapnel’s Long Term Forecasts, 2010 – 2025 report predicts economic growth will accelerate and average 3.8 per cent per annum over the next three years. The report also forecasts solid employment growth to push the unemployment rate down to below four per cent by early-to-mid 2013.

However, the company warns tightening labour markets and accelerating household spending will lead to higher consumer price inflation (CPI), forcing cash rates up towards 6.5 per cent pushing mortgage rates towards 9 per cent.

“While the no-policy election might drag on into next week, it is important to get back to the day-to-day running of the economy. Mining profits, the budget deficit, immigration and a ‘sustainable’ level of population were the key areas of debate, but the real policy issues for the economy were either given only cursory consideration or put in the too hard basket,” says report author and BIS Shrapnel senior economist, Richard Robinson.

“We still have a number of critical policy issues which need to be addressed, including a serious housing shortage, ongoing infrastructure deficiencies and bottlenecks and, of course, a skills shortage,” says Robinson.

The report says that weaker population growth will take the pressure off future growth in demand for housing. However the current undersupply is not likely to be adequately addressed through the current cycle given that mortgage rates are already around neutral levels. The combination of significant pent-up demand, strong rents and yields, rising incomes and an easing in funding for property developers, is expected to sustain a recovery in activity over the next two to three years.

But Robinson warns that the housing upswing won’t last.

“Minimal slack in labour markets, a recovery in consumer spending and, subsequently, business investment, will quickly see the re-emergence of capacity constraints from 2011/12,” he says.

“Labour shortages and a synchronisation of construction cycles will lead to a build up of inflationary pressures over 2011/12 and 2012/13. The RBA will be forced to respond by raising interest rates to a maximum of 6.5 per cent, which will take mortgage rates back over nine per cent and send housing activity into a controlled downturn over 2013/14.”

BIS Shrapnel says the housing shortage is a major problem because it inflates mortgage debt, which increases household sensitivity to rising interest rates and unemployment and widens the current account deficit. The shortage of housing is also is a major influence on the CPI through its impact on the rental market.

The good news is that Robinson says that the mining sector will continue to remain strong, which “should keep growth sustained over a long period with investment high”.