The lower Australian dollar will boost the domestic economy and help stimulate building activity, two respected economists in the construction industry say.

Both Master Builders Australia chief economist Peter Jones and Housing Industry Association senior economist Shane Garrett say the recent drop in the exchange rate was a welcome development and that further falls are expected.

Though cautioning he sees a ‘floor’ on the value of the currency, Jones expects the dollar to ease back further to around $US0.90 by the middle of next year and drift further downward thereafter.

He says this would help the domestic economy and support higher levels of demand for housing and commercial property than would otherwise be the case.

“I believe the lower dollar will be good for the economic growth in Australia and therefore will be good for the construction industry,” Jones says.

“The lower dollar will mean greater levels of activity in the manufacturing and service sectors and will therefore stimulate home buying through a stronger economy and greater consumer confidence as well as demand for commercial, retail and industrial property.”

Jones acknowledges the weaker exchange rate will make imported building materials more expensive but says the impact of this will not be large in the context of the overall sector cost base as the industry relies predominately on domestic inputs.

Recent falls in the value of the dollar come amid hopes a recovery in residential and commercial building will help pick up slack in coming years as resource construction activity drops back.

australian dollar chart

In its three-year forecast released in May, for instance, Master Builders said it expected a strong upturn in housing construction and a modest recovery in non-residential building – albeit with extremely strong civil sector work expected to contract.

Along with challenging global economic and project financing conditions, the high dollar has been seen as a contributing factor to low building activity levels in recent years due to its impact on the domestic economy overall as well as on demand for buildings in trade-exposed industries.

Speaking about the residential sector, HIA’s Shane Garrett agrees the dollar will decline ‘quite a bit further’ – a development he says is welcome from the industry’s perspective.

While cautioning the lower exchange rate is no ultimate panacea for the sector and may indeed reduce household income buying power and thus consumer spending and demand for housing in the short term, he says the dollar’s previous strength had hampered the economy and housing activity and that the reversal of this is good news.

“The high dollar [in recent years] in the first instance has repressed activity in certain parts of the economy like manufacturing and tourism,” Garrett says. “That has been bad particularly for the eastern states of the country and has been bad for employment, bad for activity and bad for sentiment. That in turn has repressed activity in the home building and home renovations market.”

“So as the dollar weakens, the boost to these sectors will eventually – probably not in the short term but more over the medium term – maybe a year from now and beyond, boost housing activity.”

By Andrew Heaton