RBA official warns of worse to come in Australia building slump

Sydney

THE Reserve Bank of Australia's (RBA) second-highest ranking official warned that much of the downturn in Australia's construction industry was yet to play out, and signalled house prices will likely rise as a result.

The central bank's 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 per cent lower than their late 2017 peak, he noted.

"Much of the downturn in construction activity is still ahead," Mr Debelle said in a speech delivered in Sydney on Thursday. "We are forecasting a further 7 per cent 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 one percentage point off economic growth from peak to trough, given that dwelling investment accounts for about 6 per cent 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 per cent of employment is "closely related" to the residential construction sector, Mr Debelle added.

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 has 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," explained Mr 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, Mr 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". BLOOMBERG