July 23 (Bloomberg) -- Australia's construction industry is slowing as land shortages and rising costs deter home builders, according to BIS Shrapnel Pty, a Sydney-based forecaster.

Housing starts will fall 1 percent to 148,000 in the year ending June 30, 2008, the forecaster said in an e-mailed statement. Housing starts probably will lag behind demand for a fourth consecutive year, BIS said.

Housing affordability dropped to a record in the first quarter as land prices, interest rates, labor and material costs rose, prompting more Australians to rent rather than buy. Construction may revive in the coming years, once a shortage of new homes drives up rents enough to encourage investors and consumers to start building again, BIS said.

``The 148,000 will be the trough,'' Jason Anderson, senior project manager at BIS, said in an interview. ``Rental growth is accelerating and gradually that will prompt owner-occupiers to start building.''

BIS estimates there will be demand for about 170,000 homes in 2008. House construction will also lag demand in the year ending June 2009, it said.

``There is a significant gap between the cost of renting and the cost of owning a home,'' Anderson said. ``That gap will close, but only gradually. There will be a ceiling that is going to limit the number of people who want to buy.''

Interest Rates

The Reserve Bank of Australia raised its benchmark interest rate to a six-year high of 6.25 percent last November, making home loans more expensive. Home-building contributed just 0.1 percentage point to Australia's first-quarter economic growth rate of 1.6 percent.

Non-residential building probably will decline about 10 percent this year, led by a slowdown in construction of shops and warehouses, Anderson said.

Commercial construction rose 42 percent in the year ended June 30, so the forecast decline isn't dramatic, he said.

``It's not a fall from grace. It's a softening from very high levels,'' he said. Companies such as Coles Group and Woolworths Ltd. have finished programs of building new warehouses, he said.

Total construction will fall 4 percent this year, BIS said.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

Last Updated: July 22, 2007 16:09 EDT