A major building industry lobby group has slammed the latest rise in official interest rates in Australia, saying that the increase will jeopardize economic growth and risk a boom-bust cycle in housing construction.

As the Reserve Bank of Australia (RBA) increased its official cash rate target by 0.25 percent on Tuesday from 2.85 percent to 3.10 percent – the highest level ten years – Housing Industry Association says the latest increase is unwarranted and will compromise efforts to maintain stable economic growth.

“The RBA will not restore the economy to stable growth by putting the housing industry through boom-and-bust cycles,” HIA Chief Economist Tim Reardon said.

“Home buyers have exited the new home market rapidly following the first increase in the cash rate in May. The RBA should have paused to observe the impact of the fastest increase in a generation and not continued to raise rates.

“Home building was already set to slow significantly in 2023 and today’s rate rise will exacerbate this downturn.”

Reardon’s comments came as the RBA increased its target for the official cash rate from 2.85 percent to 3.10 percent at its December monthly board meeting on Tuesday.

At this level, official interest rates are now at their highest level since October 2012. The cash rate has risen for eight consecutive months since the first increase from 0.10 percent to 0.35 percent in May.

In its statement, the RBA said that current inflation rates (6.9 percent over the year to October) remained ‘too high’.

Whilst international factors accounted for much of this, the bank said an excess of domestic demand relative to supply capacity is a contributing factor.

Retuning inflation to the target range of between 2 percent and 3 percent required a more sustainable demand/supply balance.

Going forward, the bank expects further rate rises over the near-term.

Nevertheless, it stresses that it is not on a pre-set course and that the timing and magnitude of any increases will be determined by incoming data and monitoring of conditions.

For the construction sector, the latest decision has exacerbated concerns that the Reserve Bank may overshoot in its monetary policy tightening cycle and that the downturn in home building activity may be deeper than originally anticipated.

Already, signs of slowing demand are evident.

Between July and November, data from the Australian Bureau of Statistics indicates that the number of loans which were made to owner occupiers to finance new home construction fell by 11.7 percent – albeit with housing construction lending remaining above pre-pandemic levels.

Over the four months to October, meanwhile, new home sales have fallen by 37 percent.

Not all economists agree with Reardon’s call.

In late September, Westpac Chief Economist Bill Evans called on the RBA to take strong action to bring inflation under control even if that further slowing the economy.

This was necessary, Evans says, to prevent inflation and inflation expectations from becoming embedded and necessitating more severe action down the track.

Still, Reardon says the RBA has been too aggressive.

“The risks to household and business finances from such an overly aggressive hiking cycle are clear,”  he said.

“A deep and prolonged trough in home building activity will jeopardize the return of the economy to stable growth.”

Speaking of the broader real estate market, CoreLogic Australia Head of Research Eliza Owen said effect of the latest increase  will be significant.

“The impact of recent rate rises on housing is flowing through to lower volumes of new mortgage finance secured,” Owen said.

“From May through to October of this year, the monthly value of secured finance declined -17.9 percent. Annual sales volumes have trended -13.3 percent lower compared to this time last year. Consumer sentiment through November also dropped a notable -6.9 percent.

“A lift in the cash rate of 300 basis points is noteworthy, because of the 300 basis point buffer on home loan serviceability assessment introduced by APRA in October last year. New variable home loan rates for owner occupiers increased from a low of 2.41 percent in April 2022, to 4.58 percent in October. Assuming the November and December increases to the cash rate are passed on in full, this could take average new variable rates to 5.08. For those rolling off of low fixed-term rates, an average variable rate of 5.08 percent may create a ‘sticker shock’, noting average fixed-term rates of three years or less bottomed out at 1.95 percent for owner occupiers.

“At 3.1 percent, the cash rate has now entered the lower bound of major bank forecasts for a peak in the cash rate, with forecasts made in October ranging from 3.1 percent to 3.85 percent.

“The higher rate environment will test housing market conditions in 2023, when the majority of outstanding fixed-term mortgages are expected to expire.”


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