Rate lift to soften building activity

By Gerv Tacadena | 06 May 2022

The upcycle in the Reserve Bank’s cash-rate target could potentially hamper building activity as it slows demand for homes.

Housing Industry Association (HIA) chief economist Tim Reardon said the recent move by the RBA to lift the cash rate from its historic low of 0.10% to 0.35% could see home building activity ease modestly from its current elevated levels.

“The increase in rates send an important signal for homeowners and investors considering home purchase that the period of ultra-low interest rates, is nearing an end,” he said.

“Combined with the lagged impact of migration, the volume of homes commencing construction is expected to slow to more average levels by early 2024.”

Mr Reardon said demand for housing has been “exceptionally strong” over the past two years as the environment was supported by record-low interest rates, fiscal support, and strong employment conditions.

“Demand for homes increased during the pandemic across most developed economies as households sought additional space, this has resulted in a similar boom in demand across most developed economies,” he said.

However, Mr Reardon said the increase in rates will do “little to arrest” the rising cost of building materials.

“The subsequent surge in demand for building materials, combined with constraints in global supply chains, have caused a significant shortage of building materials across the world — this has seen the cost of key building materials escalate and was a major contributor to recent inflation data,” he said.

Building approvals starting to slow down pre-rate hike

Latest HIA figures show a 3.1% decline in building approvals for detached houses in March, reversing the strong turnout recorded in the preceding month.

HIA economist Tom Devitt said despite these declines, approvals for detached home were at a higher level than they were over the first three months of 2022 compared to the same period prior to the pandemic.

“This continues to reflect the strong ongoing demand for housing in the first quarter of 2022, albeit at levels below those observed over the past two years,” he said.

Over the month, multi-unit approvals also declined by 37.7%. Mr Devitt said there are factors that could potentially lift the demand for this housing segment.

“Affordability issues, land constraints and a return of overseas migrants, students and tourists will help support demand for units, townhouses and apartments,” he said.

Mr Devitt said the impact of the latest cash rate announcement would likely take more than six months to reflect in the approvals data.

Photo by @ballonandon on Unsplash

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