Rate rise hurts home building recovery

Australia's building and construction industry associations agree today's interest rate rise by the Reserve Bank of Australia (RBA) may dent home buyer confidence and derail any sustained recovery in the building of new homes.

Master Builders Australia said home buyers' confidence may suffer as a result of the RBA's decision to lift the cash rate by 25 basis points to 4.25 per cent while the Housing Industry Association was adamant there was a risk that a lift in the construction of new homes could run out of steam before the end of 2010.

MBA chief executive Wilhelm Harnisch said the timing of the rate rise will make it difficult for a private sector housing recovery in circumstances where investor confidence remains weak.

"Higher interest rates will dent home buyer confidence and could pull the rug out from the private housing market as investors and homebuyers stay on the sidelines," he said.

"Commercial and residential builders still struggling with the effects of the credit crunch now have to factor in higher financing costs."

He said the rate hike could worsen an already significant undersupply of housing and put more pressure on rising rents which feed into inflation and, as such, all levels of government need to confront the chronic housing shortage.

HIA chief economist Harley Dale said the key action to prevent undue upward pressure on existing home values (and rents) is to ensure a sustainable boost to the new housing stock, because that reduces Australia's chronic shortage of dwellings.

"Higher interest rates doesn't advance that cause, indeed it hinders it, as does the current severe lack of finance being extended to the residential development sector," Mr Dale said.

The HIA said the RBA had now lifted interest rates five times in six meetings of the RBA board, pushing up standard monthly repayments for first home buyers with a $300,000 mortgage by $247 per month.