A key building industry lobby group in Australia has raised alarm that rising interest rates could force more construction businesses to the wall.

Responding to the Reserve Bank of Australia’s decision to raise official interest rates by a further 0.5 percent, Master Builders Australia chief executive officer Denita Wawn acknowledged the need for monetary policy to return to more normalised settings.

But she warned that many builders already challenged by supply bottlenecks would not survive if any move to tighten monetary policy too quickly led to a hard economic landing.

Time should now be given to observe the effect of the latest adjustments before going too far with further rate rises, she argued.

“The Reserve Bank’s decision to further increase interest rates is more evidence of the need for monetary policy to return to more normalised settings to combat inflation,” Wawn said

“However, while acknowledging the need to tackle the dire effects of inflation, we are concerned that a continuing regime of steep rate rises risks turning the economic dial too far in the opposition direction and stalling economic growth needed to for the continuing recovery from COVID.

“Our industry is disproportionately affected by interest rises and a hard economic landing would put at risk the viability of many building and construction businesses who have managed to come through the pandemic but whose resilience has been eroded by severe supply chain pressures. Many now lack the resilience to withstand more sharp economic shocks.”

“The building and construction industry has shouldered much of the responsibility for underpinning the economic recovery. Suppressing construction activity would counteract the efforts of governments and the expenditure of billions in taxpayer’s funds to shepherd the economy through the pandemic and protect growth.”

The latest warning follows the decision by the Reserve Bank of Australia to increase official interest rates by a further 50 basis points to 1.35 percent.

At this level, official interest rates remain well below levels of between 2.0 percent and 6.0 percent which have been observed over the past two decades – although rates are now above pre-pandemic levels of 0.75 percent.

In its statement, the bank said that inflation was expected to increase further before peaking later this year and trending downward back toward the bank’s 2-3 percent target range next year with global supply side problems ease further and commodity prices stabilise albeit at higher levels.

Whilst it acknowledged uncertainty surrounding household spending amid rising prices, rising interest rates and house price declines in some markets, it said the Australian economy remains resilient and the labour market is extremely tight.

“Today’s increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic,” the RBA said in its statement.

“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed. The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

The latest move comes as the broader property market is showing signs of slowing in the housing market.

In June, real-estate services provider CoreLogic says that overall house prices fell by 0.6 percent for the month and were down by 0.2 percent over the quarter (albeit from a high base) amid continued falls in Sydney and Melbourne.

More promisingly for builders, however, building approval data shows that excluding the statistically volatile multi-units sector, the number of new detached homes that were approved for construction increased by 1.7 percent over the three months to May and was higher compared with the three months to May 2019 (before the pandemic) to the tune of 14.7 percent.

In addition, approvals for detached home renovations remain at historically elevated levels.

This indicates that demand for builders and tradespeople will remain elevated for some time.

Speaking of the broader housing market, CoreLogic Research Director Tim Lawless said that the latest increase would add $366 to monthly repayments (including interest) for borrowers with mortgages of $500,000.

But he said that any downturn in housing values would remain orderly on account of the strength of the economy and tight labor markets.

“Indebted households are in the grip of a tightening pincer movement, where inflation on essential goods such as fuel and food, together with the rapidly rising cost of debt, are squeezing balance sheets,” Lawless said.

“Households are increasingly sensitive to rate hikes due to record levels of indebtedness.  The RBA is aware of this, noting the household sector is likely to be the source of ongoing uncertainty, especially spending behaviours as households make cut backs on non-essential spending to focus on debt servicing and non-discretionary goods such as food and fuel.

“With inflation likely to remain stubbornly high, the outlook for interest rates is for further rises throughout the rest of the year and into 2023, adding additional downside risk for housing demand.  Sydney and Melbourne home values have been trending lower through the past five months, and it’s likely this downwards momentum will spread to other capital cities and regional markets over the coming months.

“The trajectory of home values will depend on how fast and how high interest rates move, along with the performance of the broader Australian economy, labour markets and demographic trends.  A stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remains orderly.”