Rate hikes dampen construction levels

The level of completed construction work fell 1% to $28.9bn in the December 2007 quarter, with cost pressures remaining the primary concern for the building industry after swelling by 5.5% in 12 months.
Simultaneously, order books continue to grow, with the amount of building work yet to be done hitting a fresh record high of $35bn in the December quarter. Dwellings approved but not yet commenced also rose a staggering 18.7% in the December quarter, and stand 16.1% higher than levels one year earlier.
“The residential housing market, and in particular the construction of new homes, remains soggy,” said Savanth Sebastian, equities economist with CommSec.
“Potential homeowners are more interested in purchasing established dwellings rather than building brand new homes, and existing homeowners are much more focused on enhancing the value of their current homes rather than looking at building.”
Cost pressures are the primary concern for the building industry and will remain a key issue for companies in managing growth and profitability, he said.
“The strength in costs of labour and raw materials are impacting on the development of new dwellings,” Sebastian explained, adding that the small reduction in dwelling construction in the quarter is likely to have “little impact” on overall economic growth.
In the near term, Sebastian believes that activity in the residential sector may worsen before it gets better, with the current expectations of an interest rate hike likely to delay any recovery in the property market.
“The spectre of further interest rate hikes will keep the residential housing market restrained for some months. There’s growing demand for further construction of houses and the tight market is pushing rents higher, but with mortgage costs set to rise further, investors will stay well away from the market in coming months,” he said.
“There are few concrete signs of a sustainable lift in housing construction, [and] CommSec doesn’t expect a recovery in the residential property market before 2009 at the earliest.”

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