The RBA raised its benchmark cash rate target by 0.5% yesterday, marking five consecutive monthly increases totalling 2.25%, but the Housing Industry Association has warned the RBA risks overshooting on rates. Source: Timberbiz
By bringing the cash rate target from its emergency policy setting of 0.1% in May to the new setting of 2.35%, the RBA has undertaken its sharpest hiking cycle in almost 30 years.
“The RBA’s intention is to bring Australian inflation back to its 2-3% target. But the nature of the current cycle means the RBA risks pushing the cash rate too high,” HIA Economist Tom Devitt said.
“At the start of this tightening cycle there was a record volume of building work underway and a significant volume of work still to commence construction. This is providing the building industry and the wider economy with a buffer against the full impacts of these rate increases.
“In a typical cycle the lag from an increase in the cash rate to a slowing in home building could be as little as six months, but in this cycle, the lag will be more than 12 months,” he said.
In July, new home sales declined by 13.1% and home lending declined for all market segments – renovators, investors and owner occupiers, including first home buyers.
Mr Devitt said the significant pipeline of work still to complete heading into this cycle would ensure building activity and demand for skilled trades remains exceptionally strong through the rest of 2022 and into 2023.
“However, the rise in the cash rate is compounding the impact of the rapid increase in the cost of building a new home that occurred due to the constraints on global supply chains. The rising cost of construction would, by itself, have slowed building activity,” he said.
“It will not be until mid-2023 that the effects of the first rise in the cash rate adversely impact the volume of work on the ground. Subsequent increases in the cash rate will have exacerbated this slow down.
“With long lead times in this current cycle there is a greater risk that the impact on unemployment of a rapid rise in the cash rate will be obscured and that the RBA will overshoot with unnecessary rate increases,” he said.
