Low Borrowing Costs Are Still a Very Good Story 1

Wednesday, November 18th, 2015
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Low borrowing costs have obviously been a tremendously important ingredient to both the strong upcyle in new home building – now into its fourth year – and the growth (where it is occurring) in residential property prices.

They may now also assist a fledgling recovery in renovations activity to gather legs late in the cycle.

Low borrowing costs remain extremely important, not to only to the prospects for the residential and commercial construction sectors in 2016, but also – as a consequence – to the broader domestic Australian economy.

Super low borrowing costs aren’t the be all and end all. This cycle is marked by huge geographical divergence in housing activity and price conditions across states and territories, while the changing composition of what we build continues to be reflected in different short term trajectories for the new supply of various dwelling types. These elements of Australia’s diverse housing market are covered in the bi-annual ACI Housing Scorecard and the quarterly ACI New Dwellings by Composition Forecasts.

Regardless of where in Australia you build, it is a fair question to ask – how much weaker would the housing industry be in South Australia without sub five per cent mortgage rates? Beyond that, how much further would residential property prices in, say, Perth or Darwin, decline without that same environment?

What we all make of the level, outlook and risks to borrowing costs matters a great deal. This of course applies to small and medium sized businesses as well as households, and some of you will be aware that small business treatment is something of a hobby horse of mine.

In Australia we have become very accustomed to an environment where borrowing costs – especially for households, but also for businesses – are extremely low. This is the case for both variable rate and fixed-term loans. This remains the status quo and that is an important point to remember and a crucial message for the residential construction industry to convey.

Granted, there are two flies in the ointment. Firstly, the tightening of credit conditions for residential property investors – imposed by the Federal Government’s regulator, The Australian Prudential Regulation Authority (APRA) – has had a wider negative impact on sentiment and activity than is desirable. It is hurting markets and sub-markets that don’t need hurting.

Secondly, we now have higher variable mortgage rates, not only from the four major banks but from smaller lenders as well.

Nice one! Which sector of the Australian economy is most responsible (through direct and indirect effects) for propping up the Australian economy in recent years? New home construction.

What does both credit rationing and higher borrowing costs have a large adverse impact on? New home construction.

Was it all avoidable? No. Was every wide-sweeping action necessary? No. That annoys me, but it is the reality of the situation.

Increased lending costs will be placed on borrowers as well as shareholders by the banks, and smaller lenders will leverage off of that. In a parallel universe, tighter lending conditions could have been targeted to markets where risk was perceived as high – that’s what macro-prudential tools can do, after all. APRA is instead overseeing a wider application of credit rationing than necessary, to the detriment of the overall residential construction industry.

Neither of those developments are preferable. However, there is a bright side and we should always think of the glass as being half full.

In a post-GFC environment where there is an obvious bias towards negative news, and tighter financing arrangements add fuel to that fire, we need to remember that interest rates are still extraordinarily low. Variable and fixed loan rates both still sit at sub five per cent. Once they start moving up again (not for at least 12 months from now, by the way), we may never see such low rates again.

That is a positive message for the residential construction industry to convey (for renovations as well as new housing), plus the message also applies to commercial construction, as we noted in our last  ACI Construction Monitor. If you’re set to go, get into new home building or renovations! That’s not an irresponsible message – people have to be financially ready and set to take on the borrowing decision. If they can, now is the time.

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  1. Barry

    Persistent low interest rates are a bad thing for economies from a long term perspective – once markets become accustomed to cheap credit it becomes very hard to wean them off without sharp withdrawal symptoms.