Explained: Why rate calls risk upsetting Australia’s residential building industry

According to the Australian Bureau of Statistics’ latest monthly and quarterly CPI data, Australia’s inflation rate has declined from its 2022 peak of 7.8 per cent to 6 per cent in the 2022-23 financial year, recording a 0.8 per cent increase in the June quarter of 2023 – the lowest annual increase since the March quarter of 2022.

Tim Reardon, chief economist at the Housing Industry Association, noted that with a long lag time before cost-of-living cuts are felt in the construction industry, the country has not yet experienced the full impact of the rate rises that began in May 2022.

“In May 2022, when rates started to rise, there was a record volume of building work in the pipeline. Even after 14 months of rate increases, this volume of work remains well above pre-pandemic volumes and is likely to stay elevated until at least early 2024,” Mr Reardon noted.

But building approval and sales data shows that change is on the way.

Sales of new homes have fallen sharply since the first increase in the cash rate – new home purchases were down 41.8 per cent in the first half of 2023 over the same period in 2022. The figures from 2023 are also 26.2 per cent down on those from 2019, which is considered a low year for new homes sales.

Loans for the construction and purchase of new homes are also down by 31.1 per cent over the year. Building approvals have started to recede, and are now 13.5 per cent lower than at the same time last year.

“Given the long lags in this cycle, the rise in the cash rate in May 2022 is now set to become evident in a slowdown on building activity on the ground,” Mr Reardon said.

The large volume of work that was in the pipeline had “obscured the adverse impact of rising rates on the building industry and on the wider economy,” he warned, with the body forecasting that in 2024 the number of new home commencements will certainly drop to records not seen since 2012, during the RBA’s last significant tightening cycle.

“This will also be one of the lowest volumes of new home starts in the past 30 years. This is contrary to the Australian government’s goal of building more than 1 million homes over the next five years,” Mr Reardon noted.

He also flagged that these substantial changes in residential construction will soon make their mark on employment figures.

“One in 10 Australians are employed in the home building industry, and it is not until the rise in the cash rate causes building activity to slow that the impact of the RBA’s actions will be evident in employment figures.

Real Estate Institute of Australia president Hayden Groves pointed that the latest CPI figures are promising, and urged the RBA to continue to hold the cash rate steady rather than pursuing further rate rises at this time.

Knowing that Australia’s unemployment rate of 3.5 per cent would likely encourage the RBA to continue rate rises, Mr Groves suggested that the board “rethink the economic orthodoxy on the level of unemployment required for inflation to be neither rising nor falling – the non-accelerating inflation rate of unemployment (NAIRU)”.

Michele Bullock, the RBA’s deputy governor, said in a speech last month that the board expects to see the unemployment rate to rise to around 4.5 per cent in late 2024, which would be “not far off some estimates of where the NAIRU might currently be”.

Mr Groves added that the housing supply issues currently being experienced around the country continue to be a significant driver of inflation, with rents up 2.5 per cent in June 2023 over the previous month.

Perth recorded the lowest level of inflation out of the capital cities, with the West Australian capital’s rate dropping to 4.9 per cent across the year to June 2023.

The state’s treasurer, Rita Saffioti, commented that mortgage holders in the state continue to flag cost-of-living pressures, and that she hopes the RBA will use this data to hold the cash rate steady.

“Western Australia has the lowest year‑ended inflation in the nation, but we know that many households are continuing to do it tough – particularly following the steep hikes in interest rates over the past year, which we hope can now ease following the latest inflation data,” Ms Bullock said.