Just when quite a few analysts and economists were getting hot to trot about how the rise in top-end house prices in the past two months marked some sort of turning point for the sector (and we have to include the Commonwealth Bank’s CEO, Matt Comyn here as well), a bucket full of cold water was thrown into the mix by the second most powerful executive at the Reserve Bank.
Deputy Governor Guy Debelle told a finance conference in Sydney that the slide in investment in the housing construction sector will weigh on the economy through next year but the recent rise in house prices won’t have the impact many people claim.
And Dr. Debelle said the impact would spread across parts of the economy outside building and construction.
Dr. Debelle said there was a “sizeable downturn” underway across the construction sector which will be a drag on the wider economy and lop a big chunk off GDP.
He said while the bank was forecasting a further 7% drop in housing investment over the next year there was “some risk” the impact could be larger and wider than the bank forecasts.
“We are forecasting a further 7 percent decline in dwelling investment over the next year, and there is some risk the decline could be even larger. This will directly subtract around 1 percentage point from GDP growth from peak to trough, given that dwelling investment accounts for around 6 percent of GDP,” Dr. Debelle told the Sydney audience.
“The effect of the downturn in housing construction on the broader economy, though, is likely to be somewhat larger than 1 percentage point given the linkages the sector has with other parts of the economy.
“For example, the residential construction sector has linkages to the business services sector through architects, draftspeople, and construction engineers, and to the manufacturing sector through steel, bricks, etc.
“The residential construction sector itself accounts for around 2 percent of total employment. But when we look more broadly, just under 6 percent of employment is closely related to the residential construction sector.
He did point to some small positives – the fact that workers in housing construction could easily move to jobs in infrastructure and that a few big developers had told the bank they were retaining staff because they can see through the downturn to an upturn where workers will be needed quickly.
He said it appeared demand for new houses and apartments at the moment were around the same low levels evident in late 2018.
“The typical lags between the sale and construction of new dwellings imply that the decline in dwelling investment will continue for some time, despite the recent signs of stabilisation in the established housing market,” he told the conference.
“2020 looks like being the low year for the residential construction sector. But we can see through the trough to the other side. Demand is still continuing to increase given population growth. While there are pockets of oversupply, particularly in parts of Sydney where the vacancy rate is high, they are not widespread.”
Dr. Debelle said while demand will grow, the long time it takes for apartments and units to be approved and built meant it would take some time for supply to catch up that in turn would have an impact on prices.
“The growth in demand without a meaningful supply response will lead to a larger price response,” he said. And he made clear there was little the RBA could do directly about a price rise.
“From a financial stability perspective that is not so much an issue if it is not accompanied by a material expansion in borrowing,” he said. “Housing price increases clearly have a distributional impact, but monetary policy is not well placed to address that.”
House prices in Sydney and Melbourne have climbed sharply over the past three months after dropping by 15% and 11% respectively in the two cities. But that followed price increases of 58% cent in Melbourne and 75% in Sydney between 2012 and 2017.
Dr. Debelle said the bank’s focus remained on the jobs market and the overall economy.
“Monetary policy is concerned about aggregate outcomes for inflation and unemployment. In that regard, unemployment is a little higher than it was at the beginning of the year, and there has not been much upward pressure on wages,” he said.
“In turn, this has contributed to the extended run of inflation outcomes below the medium-term target range.
“As a result, the board has decided to ease monetary policy in recent months. These actions take account of the expected evolution of the housing cycle that I have talked about today.”
