Australian Construction Demand to Fall as Interest Rates Increase: Industry Associations

A construction site is seen empty in the central business district of Parramatta in Sydney, Australia, on July 31, 2021. Lisa Maree Williams/Getty Images

Australian industrial peak bodies have anticipated that the latest interest rate hike will drive down demand in the construction industry, with the residential sector expected to be significantly affected.

The Australian Industry Group and Housing Industry Association’s performance of construction index for April dropped by 0.6 points to 55.9.

A score above 50 indicates an expansion in construction activity, while a score below 50 indicates a contraction.

Australian Industry Group’s chief policy advisor Peter Burn said that although the growth of new construction orders in April was more significant than in March, the industry was adversely affected by materials and labour shortages and rising input costs.

He also mentioned that the factors determining whether the industry could meet higher activity levels were the supply of skilled labour and the recovery of supply chains.

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

After the Reserve Bank of Australia (RBA) raised the cash rate to 0.35 percent on May 3, the Commonwealth Bank of Australia was the first of the big four banks to increase its standard variable home loan rates, followed by ANZ and Westpac.

National Australia Bank was the last to hike the home loan rates on the morning of May 4.

RBA governor Philip Lowe has warned that the central bank could lift the interest rates further in the upcoming months to prevent inflation from growing considerably.

A construction site at Marsden Park is seen closed down due to COVID-19 restrictions in Sydney, Australia, on July 19, 2021. Mark Evans/Getty Images

Meanwhile, data from the Australian Bureau of Statistics showed that the total value of new loan commitments for housing went up by 1.6 percent to $33.3 billion (US$24.14 billion) in March.

Out of this amount, $21.6 billion came from loans obtained by homeowners, which was 2.2 percent lower compared to the previous year.

The remaining $11.7 billion was the amount of loans taken by investors, representing a 2.9 percent growth in value.

In the meantime, residential property markets of Sydney and Melbourne have slowed down as the CoreLogic national home value index increased by 0.6 percent in April, the slowest growth since October 2020.

Sydney housing values have declined for three consecutive months and dropped 0.2 percent in April, while Melbourne housing values also dipped over three out of the past five months.

CoreLogic’s Research Director Tim Lawless said that with the rise of the RBA cash rate, it was likely for the housing market to lose momentum over the remaining of the year and into 2023.

“Stretched housing affordability, higher fixed-term mortgage rates, a rise in listing numbers across some cities, and lower consumer sentiment have been weighing on housing conditions over the past year,” he said.

“As the cash rate rises, variable mortgage rates will also trend higher, reducing borrowing capacity and impacting borrower serviceability assessments.”