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By Bryce Yardney
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New home sales plunge as cash rate continues to increase

The housing market has been hit hard by a series of cash rate increases, with new home sales plummeting as buyers struggle to afford the higher borrowing costs.

In fact, according to HIA's Chief Economist, Tim Reardon, "sales of new homes fell again in January, down by 12.8 per cent for the month, leaving sales in the previous three months a remarkable 46.7 per cent lower than in the previous year."

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Future home construction is expected to decline further

According to HIA's New Home Sales Report, building activity is expected to start to contract late this year without an improvement in access to finance or a lowering of rates.

There is a risk that once the contraction in a home building occurs, it will slow down activity across the rest of the economy.

Mr Reardon commented:

"Sales of new homes have stalled in recent months as the adverse impact of the RBA’s rate increases continues to erode market confidence.

There is no indication that the market has reached the bottom of this cycle with sales falling in all states.

A further increase in the cash rate in February is likely to see sales fall further.

Without an improvement in access to finance or a lowering of rates, building activity will start to contract from late this year."

RBA overshoots interest rate increases, putting building industry in boom-and-bust cycle

The RBA's focus on interest rate increases to address inflation has resulted in a roller coaster ride for the building industry.

In the past, the RBA has overshot interest rate increases, which led to a boom-and-bust cycle.

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It appears that the RBA is set to continue this cycle, with a further increase in the cash rate likely to see sales fall further.

Mr Reardon further commented:

"Many buyers have been forced from the market by the higher rates, but even those buyers unaffected by the RBA’s actions are unwilling to purchase given the economic uncertainty.

There are long lags in this cycle given the large volume of building work underway which will obscure the impact of the rate rises on the wider economy.

There is a risk that once the contraction in a home building occurs, and slows activity across the rest of the economy, it will prove difficult to stop.

The RBA overshot interest rate increases after the GFC and in previous cycles, resulting in a roller coaster ride for the building industry.

It appears that the RBA is set to continue this boom-to-bust cycle."

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Further, the focus of policymakers should be on other tools to address inflation, not just interest rates.

Interest rates are a poor tool for addressing inflation, and fiscal policy measures have been shown to be better at managing the risks of embedded inflation.

The RBA needs to use a more comprehensive approach to promote stability in the economy.

New South Wales and Queensland see a steep decline in sales

For the three months to January 2023, new home sales in New South Wales were down by 73.1%, followed by Queensland (-53.9%), Victoria (-41.6%), and Western Australia (-21.7%).

South Australia saw an increase of 2.0%.

This data underscores the impact of cash rate increases on the housing market, particularly in New South Wales and Queensland.

About Bryce Yardney Bryce is a property development specialist, having successfully sourced, project managed and completed hundreds of development projects for Metropole’s clients, helping them create substantial wealth.
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