The Victorian building industry has called for caution from the Reserve Bank in deciding whether to increase interest rates. According to Victorian executive director Brian Welsh, in spite of a strong economy the housing sector is cooling, with lower activity expected next year, while the inflation outlook remains benign.
Welsh says total dwelling approvals increased by 7.4% seasonally adjusted in October, 2003, to 4,724 units, mostly due to a rise in “other dwelling” component, which covers multi-unit and high-rise development, which was up 15.4% in the month.
He says private sector house approvals – the best measure of the state of the market – increased only 3.7% in October to 3,039 units seasonally adjusted. On a quarterly basis, however, they were down 2.5%, indicating that the market has hit its peak.
In the year to October, 2003, private house approvals fell 7.3% to 33,361 houses, while total dwellings were down 6.3% to 46,759 units.
Welsh says the latest data pre-dates the rise in official interest rates announced in early November.
“Current evidence suggests the market might be headed for fall; auction clearance rates have fallen substantially in the last three weeks, real estate agents are talking of price drops in existing property over the next year, and builders have expressed the view in MBAV’s recent sentiment survey that activity will ease in the next six months.”
This evidence suggests there is no need to rush to a further increase in rates.
“We believe the RBA can afford to wait until early next year to obtain a clear picture of the current housing market, despite Victoria’s strong figures.”
Welsh says it appears the market has passed its peak, and a rise in rates could push the housing sector into accelerated decline.
Given the new housing market’s contribution to the economy and its strong linkage to consumer sentiment, MBAV is concerned that this confidence can be quickly sapped by repeated interest rate rises, potentially leading to a rapid decline in activity.
“The recent interest rate increase appears to have had the desired effect on the market,” says Welsh.
“In this respect, the RBA can be said to have achieved its aim of taking the wind out of the market’s sales. Another immediate increase might do more harm than good.
“With inflation still well under control, an aggressive interest rate policy is not entirely necessary at this point in time.”
