Rates set to remain on hold as construction slows

Australia’s poor-performing construction industry and a fall in first-time homebuyers could prompt the Reserve Bank to keep interest rates on hold for the next few months.

The latest Australian Performance of Construction Index, released by the Australian Industry Group and the Housing Industry Association, reveals the index lifted 1.6 points to 43.8 in the December quarter. A reading below 50 indicates the industry is declining.

Dr Peter Burn, AIG director of public policy, says despite a lift in engineering construction and reduced declines in residential and commercial construction, the industry witnessed a disappointing end to 2010.

“Businesses and homebuyers continue to refrain from committing to new projects with expectations of further rises in interest rates a likely factor,” Burn says.

HIA senior economist Andrew Harvey says house-building activity fell for the seventh consecutive month in December.

“With further falls in new orders for houses and apartments, this month’s report is one more piece of evidence that we are heading into a much weaker period for residential building,” Harvey says.

“The wait for affordable land is one of the primary obstacles to new house-building areas… while the apartment market continues to struggle under tough credit conditions.”

“A sustained period of contraction in both of these market segments will continue to lock many prospective homebuyers into the rental market for years to come.”

Harvey’s comments are substantiated by recent reports from mortgage brokers revealing a sharp decline in first homebuyers.

According to mortgage broker Loan Market, mortgage inquiries from first homebuyers fell to 30% of all inquiries in December, down from 45% in June.

Loan Market chief operating officer Dean Rushton told The Australian Financial Review interest rates are a major disincentive for first homebuyers to enter the market.

“Four interest rate rises last year by the Reserve Bank of Australia, and the prospect of more this year, is squeezing these people out of the market,” Rushton said.

Economists predict the RBA will keep interest rates on hold until the next quarter, particularly in light of the news that Australia’s trade surplus narrowed in November, indicating the economy is softening.

Citibank economist Paul Brennan says the Queensland floods are also likely to influence the RBA’s decision.

“The case becomes more compelling for the RBA to leave monetary policy at its current setting for at least a few more months,” he says.