Construction industry banks on further rate cuts

12/03/13 6:26 AM

Construction industry banks on further rate cuts

PUBLISHED: 09 Mar 2013 PRINT EDITION: 09 Mar 2013 Gift Article: 100

Property players ... estate agent Sandro Petrini, left. sold his brother Enzo Petrinis house in Chatswood for $200,000 above the reserve price. Photo: Nic Walker Joanna Heath The Reserve Bank of Australia will have to cut the official cash rate to a record low of close to 2 per cent from the present, already low, 3 per cent to spark a strong revival in the non-mining construction industry, some economists say. A private survey conducted this week by the Australian Industry Group and Housing Industry Association shows that the national construction industry is contracting at its slowest rate in three years. But the index used to measure the industrys health remains stuck below the 50-point level that separates expansion from contraction and it has been there since May 2010. Master Builders Association chief executive Wilhelm Harnisch says the situation looks grim on the ground, despite 1.25 percentage points in official interest rate cuts from the RBA last year. Commercial builders ... are really doing it tough and reporting that they simply dont have enough forward work, and they are concerned [about] what that means, Mr Harnisch said. While some of the early indicators are that there is a prospect of an improvement in conditions for residential, theres no sense that were going to be returning to boom conditions. Even when we do get a whiff of a recovery, the view is that its likely to be less than [in] previous cycles. Deutsche Bank economist Phil"ODonaghoe cautions that hopes that non-mining related construction work will replace mining as a significant economic driver once the boom recedes may be misplaced. He argues that the cash rate will have to be cut to 2.25 per cent at a minimum for the switch-over to happen. The broader picture is [that] ... were yet to see evidence of non-mining construction or residential construction showing much life, Mr ODonaghoe said. The exchange rate is playing a big role that impacts the broader, non-mining economy. Unless youre related to the mining sector, youre facing a lot of competition, he said.

http://www.afr.com/p/national/construction_industry_banks_on_further_kCd9YYhEY28tef3XWUse2H

Page 1 of 2

Construction industry banks on further rate cuts

12/03/13 6:26 AM

The space to expand is not as big as it would be otherwise. With rates just 0.25 percentage points away from a record low, the RBA has expressed concern that cutting them much further could spark distortions in the market, including damaging asset bubbles of the type seen in Australia in the early 2000s. Mr ODonaghoe says those fears are unfounded, especially as mortgage rates are higher than the base cash rate, thanks to unwillingness on the part of banks to pass on the rate cuts in full. Were a long way from that, Mr"ODonaghoe said. Economic growth figures released this week include a 3.4 per cent increase in private new dwelling construction in the December quarter, which, HIA chief economist Shane Garrett said, showed the crucial role of interest rates in helping to pick the housing industry up off the floor. Commonwealth Bank of Australia chief economist Michael Blythe takes a positive slant on that data, arguing that it is consistent with a typical construction upturn. The economic fundamentals favour a lift in residential construction activity, he said. Significant pent-up demand for dwellings exists on our estimates. And this demand is set to increase given population growth is picking up again.

READ NEXT:
Home prices preparing for lift-off Joye | Housing caught between jobless and the dollar Promising patches emerging for property buyers House prices recall good old days Land buyers bear heavy cost of infrastructure Government to review NRAS after abuse claims Destiny day for Noosa, Port Douglas High anxiety: architects and engineers push boundaries The Australian Financial Review

Create an alert
Click on the links below to create an alert and receive the latest news as it happens People Wilhelm Harnisch Topics Construction & Engineering/Building Construction, Construction & Engineering/Housing Construction, Economy

http://www.afr.com/p/national/construction_industry_banks_on_further_kCd9YYhEY28tef3XWUse2H

Page 2 of 2