Rates rise still likely, despite GDP fall: HIA

Larry SchlesingerMay 31, 2011

GDP figures showing the economy contracting 1.2% in the March quarter are unlikely to stop the Reserve Bank from raising interest rates in the next few months, according to Housing Industry Association chief economist Harley Dale.

The March quarter result is the largest quarterly fall in GDP since the March quarter of 1991.

Despite this, real gross national income increased by 0.3%, driven by an increase of 5.8% in the terms of trade on the back of stronger commodity prices.

Dale told Property Observer it was fair to say that updated domestic demand was “stronger than consensus expectations”, increasing the likelihood of an interest rate rise between now and August.

“I am not saying interest rate should rise, but this does increase the likelihood of a rate increase,” he says.

The ABS attributed to the shrinkage in the economy to the floods in December and the cyclones in Queensland and Western Australia, which it says has had a “significant impact on the March quarter activity”.

An increase in interest rates could put many more home owners under mortgage stress.

UBS analyst Jonathan Mott was reported in The Australian as saying that an increase in interest rates could force the value of mortgages considered in arrears to double.

The ABS figures revealed that expenditure on new housing and alterations made positive contributions to national accounts figures. New housing expenditure rose by 4.5% in the March 2011 quarter, and expenditure on alterations and additions increased by 4.9%, with total dwelling expenditure making a contribution to growth of 0.3%.

However, HIA senior economist Andrew Harvey says most of this positive contribution reflects decisions taken by home buyers before the interest rate hikes of late last year.

“This is a good result, but it is now history – the leading indicators for housing provide compelling evidence that new residential building is heading into a much weaker period,” he says.

“Given the backdrop of the persistently tight credit conditions still afflicting residential developments and major uncertainty over the Gillard Government’s proposed carbon tax, new housing construction is unfortunately not going to excite anytime soon.”

Dale says he expects renovation activity to continue in the coming quarters but on the evidence of new housing indicators, it will be difficult to keep repeating new dwelling growth in future quarters.

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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