Residential Housing Boom Bad News for Borrowers 2

Wednesday, March 4th, 2015
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Record home construction over the next 12 months should give the economy a much-needed boost, but could also put the brakes on more interest rate cuts.

Approvals for the construction of new homes rose 7.9 per cent in January, beating market expectations, and were up 9.1 per cent in the 12 months to January, the Australian Bureau of Statistics said on Tuesday.

CommSec chief economist Craig James said the record amount of housing construction in the pipeline may temper the Reserve Bank’s desire to cut interest rates.

“Clearly, the economy is not grinding to a halt,” he said.

After the construction data was released, the RBA surprised financial markets by keeping the cash rate unchanged at 2.25 per cent, and mentioned the strong Sydney housing market as a pressure point.

JP Morgan economist Ben Jarman said while the RBA is concerned about the economy’s sluggish growth the booming housing market probably was the key factor that held it back from cutting the rate again.

“The housing market in Sydney, in particular, did see a strong initial response to the February easing, which is probably making officials a little jittery, and keen to sit back and observe how the spillovers accumulate,” he said.

However, Mr James is confident the rise in prices will ease next year as more homes come onto the market.

“As the raft of new apartments and houses comes on to the market over the next year, it will put downward pressure on home prices,” he said.

National Australia Bank senior economist David de Garis said it will take some time for this surge in new homes to be built because a large proportion of them are flats.

“It will help in time, but with apartment approvals the lags are longer,” he said.

“It’s problematic for the RBA because they’ve certainly got growth in dwelling investment but they need a lot of growth elsewhere, so we still think there is room for the RBA to cut in the months ahead.”

Private sector house approvals rose 0.4 per cent in the month, while the category covering apartment blocks and townhouses rose 19.6 per cent.

HIA economist Geordan Murray said the surge in multi-unit dwellings shows that housing preferences are changing in Sydney, Melbourne and Brisbane.

“January 2015 was only the second month on record when the total number of multi-unit dwellings approved eclipsed the number of detached houses approved,” he said.

“These three states typically account for around 80 per cent of all multi-unit residential building and when you have all three performing strongly, its a recipe for a strong national result in this segment of the market.”


By Jason Cadden
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  1. Richard Jones

    That might be bad news for borrowers but it is good news for those wishing to enter the property market. Australia has a diabolical shortage of housing which will only be addressed through beefing up new housing construction. To the extent these figures indicate that this is happening, that is good news for long term housing affordability.

  2. Gale D.

    Brakes on further interest rate cuts? They're already at absurd and unprecedented lows.