ECONOMICS THOMAS DEVITT HIA Economist ROLLERCOASTER RATES Are interest rates going up or down? Recent months have seenspeculation about the directionof future interest rates shift intooverdrive. While the Reserve Bank of Australia (RBA) has clearly been signaling its next move will likely see interest rates increase, a number of experts have broken from the herd, saying the next change could actually be a cut. The idea of an increase is well-founded: the labour market has been steadily improving with the national unemployment rate dropping to five per cent in December. There is also some evidence of strengthening wage growth which should translate into inflationary pressures if the next interest rate move is indeed an increase. Australia is nearing 30 years of economic growth, with growth returning to trend following the mining and resources fallout, the building work which will detract from consumption-led growth, which will continue boom in residential building activity and then economic growth. The greater risk is that to support Australia’s economic performance. a surge in public infrastructure spending. the change in housing wealth could cause Global borrowing costs are another factor This is supported by a positive global households to cut back on spending. If that the RBA will be watching closely. If the economy – where the US is in one of its household consumption deteriorated it nation’s major lenders see further rises in longest economic recoveries on record would cast a larger shadow than the drop their cost of capital they will inevitably pass and China continues to generate economic in building activity. In this scenario the RBA on these costs to borrowers. If higher lending growth rates beyond the dreams of any would pare back its outlook for economic rates happened to coincide with a softening developed country – which has grown on the growth and a rate cut would be more likely. in economic activity then the RBA may look to back of advanced economies in recent years. The downturn was well-anticipated – restore balance with a cut to the policy rate. In this context, it’s difficult to argue that both in terms of the price correction and To not just delay any future increases, but the next interest rate movement could be slowing in building activity. Over the past actually cut interest rates from their current downwards. The risks to the economy lie largely four years the industry has built five years’ record low of 1.5 per cent, key indicators in two potential factors: a fear that the housing worth of new homes. While population would need to deteriorate drastically. slowdown will accelerate or a global shock. growth in Sydney and Melbourne remains Economic growth would need to weaken There is little doubt that the banking strong, the record volume of new home from the three per cent level, inflation would regulator’s restrictive lending conditions completions (particularly apartments) set need to drop from the current two per cent contributed to the housing downturn and to come onto the market in 2019 will be and unemployment would need to rise well the current credit crunch is now being absorbed by the market. above five per cent. Alternatively there would exacerbated by the banks themselves, As for the risks of a global slowdown, need to be a sudden influx of panicked which have tightened lending above and Australia’s greatest source of both upside and reports from the business sector. beyond APRA’s requirements. APRA’s downside risk for the past couple of decades Risks are ever-present but the outlook decision to remove its caps on interest-only has been China. China’s underlying structural for the Australian economy remains positive. and investor lending in response to these issues have been present for many years Having said that, the RBA doesn’t need to changes are not likely to ease this bank- now but the Chinese economy has continued increase rates any time soon because the imposed credit crunch. to thrive. Even its current slowdown banks – through higher borrowing costs and The declines in home prices had a potentially constitutes a positive transition arduous loan application processes – are direct impact on the flow of new residential from investment-led to more sustainable doing it already. P8 BUILDING NEWS ISSUE 1/2019