Housing sector

Will Dr. Phil and Dr. Jim energize the housing industry and save us from the recession?

The housing sector is under enormous pressure and a slowdown in activity is likely, but the end result could mean a more reasonable outcome for both house prices and the cost of construction and renovation.

This could prove to be a crucial test for Dr. Jim Chalmers, the new Albanian government treasurer.

When you think of the headwinds for housing, it feels like a hurricane blowing not just on builders and tradespeople, but also on their existing and potential customers.

So let me list these headwinds in order to paint an accurate picture:

1. Soaring interest rates hurting builders and their customers.

2. The fastest rise in construction costs in two decades, the FRG reports.

3. Talk about a collapse in real estate prices with some experts announcing a 30% drop in prices!

4. A lack of workers and demands for higher wages.

5. Floods that end up creating work, but have actually also stopped work.

6. Covid challenges that force workers off site and slow down work.

That’s how CommSec Senior Economist Ryan Felsman summed it up: “While there is still a lot of work to do, we believe the housing cycle will lose momentum over the remainder of the year. year due to rising construction costs, labor shortages, rising mortgage rates, affordability constraints and declining in-migration from pre-Covid levels”.

In this scenario, a slower housing sector could mean lower construction costs in 2023, which could be helped by an increase in the number of immigrants and more workers. And, hopefully, the end of the war in Ukraine with China fully deconfinement should provide lower cost products for the construction industry.

But it’s the best case scenario. The realist must ask what happens to housing if prices crash 20% or 30%, if interest rates lead to a doubling of repayments for households with mortgages and if the United States find themselves in a recession, leading to a significant slowdown here?

Industry experts can see that a housing downturn is already underway. “Housing starts are falling back below the level where the market is actually building housing,” said Nigel Hatcher, an economist and director of the consultancy Macromonitor at the AFR Michel Bleby. “We’re going to start eating into the backlog rather than increasing the backlog. But the backlog … will support activity for some time”.

This latest observation from Nigel Hatcher shows Treasurer Jim Chalmers that he can make or break the housing sector with his October 25 budget. And he will be aided and abetted by his RBA Governor, Dr. Phil Lowe, in what he does with interest rates over the coming months.

Overnight, the United States reported the biggest rise in inflation in four decades, with June posting a 9.1% rise. That means the Federal Reserve will stick with big 0.75% rate hikes that could easily tip the US into recession. And since our RBA tends to follow the Fed with big rate hikes, albeit 0.5%, that’s not good news for us.

In The Australian today, UBS Chief Economist George Tharenou warns that the RBA must ease rate hikes by November or we could see a real house price crash.

Until recently, the money market thought the spot rate would drop from the current 1.35% to 4.5% by mid-2023, but cut it down to 3.5% by March from next year.

However, Tharenou says it would crush household bank balances and set us up for a recession and a crash in house prices. His thinking is: a cash rate of 3.5% means a mortgage interest rate of 6%, and that would cause big problems for everyone in the house. “Economy-wide interest payments next year for the household sector will almost double from now on, Mr Tharenou said. “We have never seen such a strong increase in reimbursements”. He says when you add those higher interest rates on home loans to an already rising cost of living, the Treasurer and the RBA are courting big headwinds for the economy.

Given the big bad number the Yanks got overnight (9.1% inflation), it will be crucial to watch inflation here and the RBA’s reaction.

We’ll see our June quarter CPI on July 27th and the ABC thinks the spot rate will peak this year at 2.1%. But if this reading of inflation is a US-style shock, then the RBA could rise.

the australian David Rogers says ‘UBS, Westpac and NAB expect the RBA cash rate to peak at 2.6% towards the end of the year’, but even the ABC’s call implies rates Home loan interest rates are set to rise by 0.75%, which could really stretch the budgets of many Australian households.

To understand the importance of the housing sector in the economy, in 2016 housing demand accounted for some 23.4% of GDP! This is not an area that the federal government and central bank should overburden unless they want a recession. And I know Dr. Chalmers and Dr. Phil Lowe absolutely don’t want that.

Both men’s reputations will be made or broken by what happens to interest rates and the growth of the economy by mid-2023.

George Tharenou sees greater than expected sensitivity in the housing market and sentiment to recent interest rate hikes. “We saw house prices start to come down immediately nationwide,” he said. “I think this cycle is quite pronounced and different from past downturns, when you’ve had a period of rising interest rates, which with a lag turns the housing market upside down. This time around, the housing market started to weaken quite quickly.

This is an important warning that I hope the two doctors in charge of our economic health will not ignore.