Interest rates are set to increase further as signs that the boom in detached new home construction may waning continue to emerge.
In its latest announcement, the Reserve Bank of Australia said it would raise its target cash rate by 50 basis points from 1.85 percent to 2.35 percent.
At this level, official interest rates remain at modest levels by historic standards but are now well about their levels of 1.5 percent before the pandemic.
In a statement, the Bank said that the rate increase was needed to help tame inflation – which it expects to peak later this year before easing back to the 2-3 percent range.
It expects further rate increases in coming months – the timing and magnitude of which will depend upon future data.
“The further increase in interest rates today will help bring inflation back to target and create a more sustainable balance of demand and supply in the Australian economy,” the RBA said in its statement.
“Price stability is a prerequisite for a strong economy and a sustained period of full employment. The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path. 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.”
Official Interest Rates in Australia
The latest increase comes amid increasing signs of a softening in both the housing market generally and the market for new construction specifically.
On the housing market generally, data from CoreLogic indicates that average dwelling prices dropped by 1.6 percent in August – their fastest decline since 1983.
Whilst overall national dwelling prices have risen by 4.7 percent over the past year, prices have fallen by 3.4 percent over the past three months.
In new home construction specifically, evidence is growing that demand for off-the-plan or newly constructed homes is returning to normal levels from its peak following record low interest rates and stimulus programs brought about during the pandemic.
In July, sales of new detached homes fell by 13.1 percent in seasonally adjusted terms whilst the number of loans made to finance the construction of a new home fell by 5.8 percent – albeit with levels new home sales, housing construction lending and building approvals remaining above pre-pandemic levels.
Meanwhile, builders are reporting a slowdown in the number of people who are visiting display homes – a phenomenon which is likely to lead to a further slowdown in new home sales in the second half of this year.
Despite the increase in rates and slowing of building activity, Housing Industry Association Economist Tom Devitt says that builders and tradespeople will remain exceptionally busy until at least the middle of next year as the industry works through a large pipeline of projects which are either in construction or yet to commence.
This will provide both the sector and the wider economy with a buffer against the full impacts of these rate increases.
Still, Devitt warns of a danger that the RBA could overshoot on rate increases.
“The significant pipeline of work still to complete heading into this cycle will ensure building activity and demand for skilled trades remains exceptionally strong through the rest of 2022 and into 2023,” he says.
“However, the rise in the cash rate is compounding the impact of the rapid increase in the cost of building a new home that occurred due to the constraints on global supply chains. The rising cost of construction would, by itself, have slowed building activity.
“It will not be until mid-2023 that the effects of the first rise in the cash rate adversely impact the volume of work on the ground. Subsequent increases in the cash rate will have exacerbated this slow down.
“With long lead times in this current cycle there is a greater risk that the impact on unemployment of a rapid rise in the cash rate will be obscured and that the RBA will overshoot with unnecessary rate increases.”
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