Rate rise to curb construction demand

·3-min read

Rising interest rates are expected to curb demand in Australia's construction industry, particularly in the residential sector, Ai Group says.

The Australian Industry Group/Housing Industry Association performance of construction index eased 0.6 points to 55.9 in April, but held above the crucial 50-point market that separates expansion from contraction.

Ai Group chief policy advisor Peter Burn said while new orders are growing at a faster rate than in March, the industry is finding difficulty sourcing materials and labour, as well as facing continuing prices pressures.

"The rise in interest rates announced yesterday by the Reserve Bank and the further rises foreshadowed can be expected to ease demand growth somewhat, particularly in the residential sectors," Dr Burn said.

He said while both the federal and state governments are adding to their infrastructure pipelines, the ability of the industry to meet still higher levels of activity will depend on the supply of skilled labour, including from abroad, and on the success of efforts to repair disrupted supply chains.

The Reserve Bank of Australia lifted the cash rate to 0.35 per cent from a record low 0.1 per cent following Tuesday's monthly board meeting, the first increase in over a decade..

It was a larger increase than expected by economists after last week's spike in inflation to the highest level in some two decades.

Commonwealth Bank of Australia was the first of the big four banks to hike its standard variable home loan rates on Tuesday, passing on the full 0.25 percentage point increase.

ANZ and Westpac quickly followed suit, while National Australia Bank caught up with its competitors on Wednesday morning.

RBA governor Philip Lowe has warned further interest rate rises should be expected in coming months, because without them inflation would grow substantially.

The Australian Bureau of Statistics will release retail trade figures for March on Wednesday, which are expected to show a modest slowing in in growth even before the rise in interest rates..

Economists' forecasts point to a 0.5 per cent increase in March after two solid months of growth above one per cent.

Retail spending has shown solid momentum since the turn of the year despite the outbreak of the COVID-19 Omicron variant and floods along the east coast of Australia.

However, there are concerns that the spike in petrol prices to above $2 a litre at one stage during March will have strained household budgets.

The ABS will also release home lending figures for March, which economists expect will show a further two per cent decline as the housing market loses steam.

The CoreLogic national home value index for April released on Monday rose by just 0.6 per cent, the smallest rise since October 2020.

Stretched housing affordability, rising fixed-term mortgage rates and lower consumer sentiment have weighed on house prices after last year's spike.

At the same time, the ABS will also issue its living costs indexes for the March quarter, which measure the price change for goods and services and the effect they have on living expenses for various household types.

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