The Reserve Bank believes residential construction activity will continue to fall until some time next year despite the turnaround in the Sydney and Melbourne markets, dragging on Australia’s economy until then.
RBA deputy governor Guy Debelle says the speed of the decline in residential construction activity for both apartments and houses had taken the RBA by surprise, and that the central bank forecasts a further seven per cent fall in dwelling investment over the next year.
That will result in a direct one percentage point reduction in the rate of economic growth from residential construction’s 2016 peak to the expected trough, although the actual drag will be even larger due to the ripple effect on the likes of architects, engineers, steelmakers and brickmakers.
“Given the large size of the pipeline, we had expected construction activity to remain at a pretty high level for most of this year, but it turned down sooner and by more than we had expected,” Mr Debelle said on Thursday.
“Even so, much of the downturn in construction activity is still ahead.”
With just under six per cent of employment closely related to the residential construction sector, the expected decline has direct implications for the unemployment rate and an RBA cash rate that has halved over the past five months to a fresh record low 0.75 per cent.
The Australian Bureau of Statistics will release its September jobless figures later on Thursday.
Nonetheless, Mr Debelle told the CFA Societies Australia Investment Conference the effect of the residential drop off would be mitigated by many workers shifting to non-residential construction.
Some large developers have also said they are retaining employees through the trough for the eventual demand-led recovery.
“While the increase in supply has finally met the earlier increase in demand, demand will continue to grow given population growth but supply is going to decline,” Mr Debelle said.
“So there is quite likely to be a shortfall again in the foreseeable future.”