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An expert warned that the number of housing starts in the country is set to decline in 2023 before hitting its lowest level in a decade in 2024, as the rate hikes continue to zap market confidence.
Tim Reardon, the chief economist for the Housing Industry Association (HIA), stated that the 2022 cash rate increases were instrumental in bringing the latest building boom to an end.
Since May last year, the Reserve Bank of Australia (RBA) has pumped up interest rates in the country for nine consecutive months to stand at 3.35 per cent in February, as it continues to struggle to rein in the surging inflation within its 2 to 3 per cent target band.
Notably, the Reserve Bank retained its hawkish outlook for its policy at the end of its latest board meeting, citing the stubbornness of inflationary pressures and increased potential for huge wage jumps.
“There was a large volume of work in the pipeline when rates started to rise in May 2022, and there remains a record number of homes under construction, but this will shrink quickly as market confidence continues to fade,” he explained.
This weakened confidence in the housing market is now translating into a slump in lending figures, according to the expert.
“Lending for the purchase or construction of a new home had already fallen to its lowest level since 2012 by the end of 2022, and the full impact of last year’s rate increases is still to flow through to households,” Mr Reardon said.
In its updated outlook report for the industry, HIA predicts the number of detached housing starts will fall below 100,000 per year for the first time in a decade to just 96,300 in 2024 — a rapid slowdown from the 149,000 starts in 2021.
While multi-units saw slower construction commencements in 2022 due to the acute shortage of labour and materials, which saw projects postponed until 2023, Mr Reardon expects activity in the sector to fare better than its detached counterpart.
“Unlike detached home construction, the number of multi-units commencing construction should increase as the acute shortage of housing, returning migrants and students, and affordability constraints continue to drive demand for housing,” he stated.
Mr Reardon also expressed his concern that the Reserve Bank’s current approach to interest rates could lead to a repeat of the slowdown experienced by the construction industry after the global financial crisis (GFC).
“Following an initial cut to rates, the RBA then increased rates quickly, bringing the building industry to a stall, before being forced to cut rates again to avoid adverse impacts on the wider economy,” he explained.
He also cautioned that higher rates would further impair the ability of the market to respond to the acute shortage of housing stock.
Mr Reardon suggested that easing restrictions on first home buyers’ access to mortgages could be a policy tool available to the government.
Over the past decade, he highlighted macro-prudential restrictions have made borrowing increasingly expensive for those with less than a 20 per cent deposit, which leads to banks lending more to those who already own a home.
“Easing the barriers to home ownership need not undermine the efforts of the RBA or the government to reduce inflationary pressures,” Mr Reardon concluded.
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