What an interesting month and a bit to the beginning of 2015.
Much of the world has decided to get a little glum on growth prospects and more than a little bolshy on putting pressure on their exchange rates. Here in Australia, the Reserve Bank looks at interest rates and says 'even though they’re really low, let’s take them even lower!’
In its own right, that’s good news for household and business borrowers, provided the 25 basis point cut in the Official Cash Rate (OCR) is passed on. Our financial institutions appeared a little slow on the uptake at the time of writing this article.
The overriding economic tone has generally been negative this year. One could read the downgrades to the economic outlook contained in the Reserve Bank of Australia’s (RBA) latest Monetary Policy Statement and then think about lying down for a while to recuperate.
It is true that the economy should be running a little better than it is. We have had three years of falling borrowing costs and they are now at or close to record lows. Households with a mortgage have, smartly, focused on paying down their debt and that is a good thing. Household wealth is rising, the Aussie dollar is (finally) falling. Unemployment is trending higher but it could be much higher than it is (although youth unemployment levels are uncomfortable and represent a social as well as economic challenge).
Given the factors just outlined, the Australian economy should not be performing below par. It is, however, and the RBA is simply reflecting that fact in their latest communication.
What the RBA also noted is that new residential construction is running along very well and has more gas left in the tank. A further 25bp reduction in the OCR should further lift the growth momentum new home building was already displaying. So, we might live in a highly uncertain world where short term growth prospects for Australia have just been downgraded, but it's not all bad!
In terms of new residential construction, the key momentum is with medium/high density construction. This segment of the market looks set this year to run at a level over 130 per cent above its 25-year average, simply because the growth in the last couple of years has been so rapid.
All other components of new home building look set to begin 2015 with higher than average levels of activity – detached houses by around six per cent, semi-detached product by five per cent, and one/two storey ‘walk-ups’ by 13 per cent. This is a healthy short-term outlook and the latest interest rate cut will generate further demand, although the magnitude of that additional demand is debateable. I think it will be modest.
What would be great to see is the recently refreshed super low interest rate environment complimented by some policy reform focus. One compliment to a very favourable borrowing environment (which the RBA implies will be around for a long while), would be more flexibility for knock-down rebuild activity in established suburbs. A concerted residential consolidation focus would update Australia’s housing stock with more energy efficient new product, and enhance housing and labour mobility (ACI Research KDR). There would also need to be a focus on infrastructure provision, among many other factors.
The point is, let’s leverage off a low borrowing environment to create even more favourable building conditions. New housing activity is primarily (but not solely) driven by three factors: low borrowing costs; the lagged impact of historically high net overseas migration, and record foreign investment in new property. Another primary driver should be a modest start to a housing supply reform process.