Rate rise could spell disaster: Building Industry

23/10/2007 - 11:35

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Australia's peak building industry body has reiterated calls for both sides of politics to be mindful of inflationary pressures when considering economic policy.

Rate rise could spell disaster: Building Industry

Australia's peak building industry body has reiterated calls for both sides of politics to be mindful of inflationary pressures when considering economic policy.

In its September quarter survey of the building and construction industry, the Master Builders Australia said building activity had risen during the quarter despite an interest rate rise in August and pre-election uncertainty.

But the survey also reinforced the MBA's own calls for sound national economic policy to be front of mind for all political parties, particularly in relation to inflation and interest rates.

The challenge for the future Australian government, regardless of which party is elected, is to maintain a conducive policy environment that builds on the past 16 years of economic growth and prosperity without adding to inflationary pressures, the MBA said.

This will require an integrated and multi-faceted policy response, including policies and programs to deal with skill shortages and infrastructure bottlenecks, and labour market reform, the MBA said.

"The September quarter survey reveals builders becoming more positive about the outlook for residential activity with conditions in the non-residential sector expected to remain strong," MBA chief economist Peter Jones said.

"Builders now expect residential activity to improve over the next six months despite lingering concerns about housing affordability and other constraints on business activity."

Mr Jones said that despite the positive sentiment, momentum gathering force in the residential sector would be set back if interest rates were to move higher.

"There is a critical need to boost supply, not hold it back, given that Australia is currently under building by around 20 per cent or 30,000 dwellings per annum," Mr Jones said.

The Reserve Bank of Australia will announce its decision on interest rates on November 7, with tomorrow's consumer price index - the key measure of inflation - set to make or break the case for a rate hike.

Interest rates are the RBA's chief weapon in fighting inflation.

"After a lengthy residential downturn, further constraints on supply will simply result in an escalation of pent-up demand as housing needs stemming from population growth and household formation will be unable to be satisfied," Mr Jones said.

"... if the Reserve Bank does lift interest rates in an attempt to counter inflationary pressures, the housing market will tighten further and rents will move higher which, in turn, would feed into higher inflation via the CPI with the potential for a vicious cycle to develop."

The MBA survey showed that building activity was expected to improve over the next six months as were profits for businesses involved in the building industry.

However, the survey also revealed pressures related to finding skilled labour appeared to be growing again, with acute skill shortages in some states and difficulties in attracting certain categories of labour.

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