No imminent recovery in home building: RBA

The Reserve Bank does not expect the residential construction sector to mount a recovery in the near future, assistant governor Philip Lowe has said in a speech comparing the performance of the mining and non-mining sections of the economy.

His comments come as ABS housing finance figures show the number of loans for the construction or purchase of new homes lifted by 3.5% in March but are still tracking at post-GFC levels of below 8,000 monthly mortgage commitments.

Lowe said the RBA had expected dwelling approvals to pick up gradually over 2011, but this pick-up had not eventuated.

He described this as the “biggest surprise” in terms of the demand-side of the economy.

“One possible explanation for this is that it is one of the side effects of a return to more traditional savings and borrowing behaviour by households,” Lowe said.

“This change in behaviour is having ripple effects through the economy, including through a lowering of expected capital gains on housing.

“This has made developers, financiers and households less willing to commit to new construction despite rising rental yields, lower prices relative to income and ongoing growth in population.

“While, at some point, the improving fundamentals should generate a pick-up in home building, the recent forward-looking indicators do not suggest that this is imminent,” Lowe said.

During the speech, Lowe also highlighted that the RBA expects the current low rate of underlying inflation to persist over the next few years, which would give it the flexibility to cut interest rates further.

“The bank’s latest inflation forecast is for underlying inflation, abstracting from the effects of the carbon price, to stay close to its recent rate over the next one to two years,” said.

He also highlighted big differences in the growth rates and demand for goods and services related to the mining sector compared with the non-mining sector, with the March quarter CP data showing “declines in the prices of most goods, the price of domestic holidays, and for the price of new dwellings”.

“These are all areas where demand growth has been soft and firms’ margins are under downward pressure,” Lowe said.

He said the RBA expected overall GDP growth to “return to around trend over the forecast horizon” with recent reductions in the cash rate providing “some boost to demand in the non-mining-related parts of the economy”.

“However, it does seem likely that growth in some sectors will remain below the average experienced over the past couple of decades.

“How things develop will depend importantly on the ability of firms to improve their productivity and on the ability of the labour market to match workers with the new jobs being created.”