(Bloomberg) -- The Reserve Bank’s No. 2 official warned that much of the downturn in Australia’s construction industry was yet to play out, and signaled house prices will likely rise as a result.
Deputy Governor Guy Debelle conceded that the central bank had been caught off guard by the scale of the slump in building activity, which turned down “sooner and by more than we had expected.” Building approvals are now around 40% lower than their late 2017 peak, he said.
“Much of the downturn in construction activity is still ahead,” Debelle said in a speech delivered in Sydney Thursday. “We are forecasting a further 7% decline in dwelling investment over the next year, and there is some risk the decline could be even larger.”
The RBA estimates the slump will trim around 1 percentage point off economic growth from peak to trough, given that dwelling investment accounts for about 6% of gross domestic product. But the effect on the broader economy will likely be larger given the industry’s links to related services sectors and jobs.
Just under 6% of employment is “closely related” to the residential construction sector, Debelle said.
Still, the RBA’s deputy said that some businesses are seeing through the trough in activity “to the other side.” While the increase in housing supply amassed during a five-year boom has finally caught up with demand, population growth will ensure that demand continues to increase, he said. That’s encouraged some developers to retain their staff through the coming slump.
“The growth in demand without a meaningful supply response will lead to a larger price response,” said Debelle. “From a financial stability perspective that is not so much an issue if it is not accompanied by a material expansion in borrowing.”
On monetary policy, Debelle said the RBA’s recent interest-rate cuts “take account of the expected evolution of the housing cycle that I have talked about today.”
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