“Hard economic landing”: Builders urge RBA to take its time on another interest rate hike as construction faces the brink

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Source: Mick Tsikas / AAP Image

A leading construction industry group has called on the Reserve Bank of Australia (RBA) to take a ‘wait and see’ approach to its cash rate hikes, as builders weigh the need to combat inflation against the likelihood rising interest rates will deter new home buyers.

The RBA on Tuesday lifted the cash rate target by 0.5% to 1.35%, a decision the central bank’s governor Philip Lowe says was appropriate given Australia’s sharp inflation rate and the overall resilience of the national economy.

But that resilience is uneven. Australia’s construction sector is suffering, as material costs skyrocket in response to supply chain hassles, global conflict, and the impacts of COVID-era demand.

Now, builders obligated to carry out fixed-term contracts are under enormous pressure, with the growing cost of materials wiping out any expected profit margin.

Business insolvencies continue to climb in the construction sector, impacting companies both big and small.

June data from credit monitoring firm CreditorWatch found 11.7% of construction firms had payments in arrears of 60 days or more, by far the worst reading of any industry sector.

There doesn’t appear to be an easy fix, and for the construction sector, there are fears the cure may be as bad as the disease: lifting the cash rate will drive down demand, alleviating some of today’s price pressures, but it may also suppress tomorrow’s appetite for new construction, hitting builders in the long run.

June data from CoreLogic shows house prices in Sydney and Melbourne have already fallen 3% and 1.9% quarter-on-quarter, respectively, likely in response to rising interest rates.

More hikes “risks turning the economic dial too far”: Master Builders Australia

Tuesday’s rate hike was “more evidence of the need for monetary policy to return to more normalised settings to combat inflation”, says Denita Wawn, CEO of Master Builders Australia.

“However, while acknowledging the need to tackle the dire effects of inflation, we are concerned that a continuing regime of steep rate rises risks turning the economic dial too far in the opposite direction and stalling the economic growth needed for the continuing recovery from COVID-19,” she said.

Industry fragility means “a hard economic landing” brought about by successive cash rate increases “would put at risk the viability of many building and construction businesses”, Wawn says.

Wawn added that “time should be given to observe the impact of the monetary policy changes in the economy”.

Despite those calls for temperance at the RBA, it appears unlikely the central bank will hold off on further rate hikes.

With inflation projected to lift from 5.1% in the March quarter to as high as 7% by the year’s end, Lowe says the RBA will take “further steps in the process of normalising monetary conditions in Australia over the months ahead”.

The big four banks also project another uptick in August.

Commenting on Tuesday’s rate hike, Anneke Thompson, Creditorwatch chief economist, said: “The RBA is probably beyond taking a ‘wait and see’ approach.”

However, a “continued dialogue” with hard-hit sectors, including construction, will be necessary for the RBA to stick the landing, Anneke added.

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