Rate cuts to follow if new home construction falls further

“In 2018, market confidence fell away as dwelling prices corrected, adversely impacting all segments of the market. Investors and owner occupiers are delaying purchase decisions and foreign investment has also fallen dramatically for numerous reasons,” Mr Reardon said.

“An additional and unanticipated factor that emerged in 2018 was the credit squeeze created as banks reduced the amount of money they are prepared to lend each customer. The impact of the credit squeeze will moderate over the first half of 2019, as the market adjusts to these new limits.”

The upcoming pipeline of building work has grown in recent years, but Mr Reardon said the backlog is being reduced, and if the situation does not improve in the first half of 2019, the pipeline will then be reduced further “at a concerning rate”.

“Builders in markets with a significant volume of work in the pipeline – such as Melbourne – have not been affected by the downturn yet, but other markets that were already performing poorly – such as Perth – have seen their market fall to a new historic low point,” he said.

“As yet, the impact of the credit squeeze does not warrant a material downgrade to our forecasts as the strength of the economy supports building activity as it recalibrates to more traditional levels.

“The building industry, which has driven activity in the rest of the economy for the past five years, is now reliant on the strength of the rest of the economy to delivery an orderly downturn.”

Mr Reardon added that if declines in overseas migrations increase at a faster pace, then he said interest rates cuts would need to happen in order to reduce the impact of the construction downturn on the Australian economy.