Real Estate

13 June, 2023

Impact of first rate increase starting to emerge in official data

Last Tuesday’s decision by the Reserve Bank to increase interest rates is going to see an ongoing slowdown in home building, while demand for new homes continues to grow, according to Housing Industry Association chief economist Tim Reardon.

Impact of first rate increase starting to emerge in official data - feature photo

“Last Tuesday’s decision marks the 12th rate increase since the RBA began this cycle in May 2022 and the impact of these early rate increases are only just emerging in official data,” he said.

Mr Reardon said this downturn in leading indicators included:

* New home sales down almost 50 per cent since the first increase in the cash rate.

* The number of loans issued for the purchase or construction of a new home has fallen to its lowest level since September 2008.

* Loans issued to first-home buyers have recently fallen to six-year lows.

* Detached house approvals are around decade lows, and likely to continue to decline for the next year.

* Multi-unit approvals are barely a third of what they were at their 2016 peak.

Commencement of new homes has not yet slowed under the weight of this record increase in the cash rate, but a downturn in activity will emerge in coming months.

“There was a large pool of work yet to commence construction in May 2022 which has obscured the adverse impact of rate rises to date,” Mr Reardon said.

“The lags in this cycle are significantly longer than previous cycles.

“The impact of rate increases to date are starting to emerge in official housing data, but it will take a further 12 months for this slowdown to be apparent in work on the ground, and the wider economy.

“This will see the number of homes commencing construction slow, as population growth accelerates.

“In addition to the increase in rates, home building is also set to decline as regulatory costs continue to add to the cost of new home construction.

“If governments continue to make building new homes more expensive, fewer new homes will be built.

“The RBA’s recognition that the housing issue is due to a failure to build enough homes is a welcome move, but it remains to be seen how this would influence future cash rate decisions.

“It also highlights that interest rates are a very blunt and ineffective tool in managing inflation and the wider economy. Fiscal policy is a far more effective and precise tool.”


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