Interest rate decision the right call: private sector construction activity not yet strong enough

05 October 2010

The Reserve Banks decision to leave official interest rates unchanged is a sensible decision recognising that public spending has been a major driver of economic activity for several quarters, according to the Urban Taskforce. The Taskforces chief executive, Aaron Gadiel, said that the statement by the bank had acknowledged the impact of the economic stimulus measures is now decreasing, while the prospects for business investment are improving.

However, it remains clear that, in the construction sector, public investment has still been responsible for a very large proportion of the recovery in construction activity, Mr Gadiel said.

 

Across Australia, work started on an extra 13,400 homes in the 2010 June quarter, when compared with the same quarter in 2009.

 

However, nearly a third of the extra homes were funded through the governments public housing program, Mr Gadiel said.

 

In NSW and Queensland, public housing made up 43 and 42 per cent of the extra housing starts respectively.

 

Mr Gadiel said the Federal Governments construction stimulus is winding down, but private sector home approvals were clearly not yet strong enough to seamlessly fill the gap.

 

According to the Australian Bureau of Statistics private sector home approvals have suffered a 7 per cent drop in just six months, he said.

 

Approvals for private sector freestanding houses have plummeted by 15 per cent in the last eight months.

 

Queenslands private sector home approvals have been trending downwards for six straight months – a 26 per cent fall, Mr Gadiel said.

 

In NSW August private home approvals fell by 14 per cent. Unfortunately these numbers are not strong enough to ensure a smooth transition from a publicly funded building boom to a robust level of private sector activity.

 

The Reserve Bank was right to be cautious and hold off any increase in interest rates.

 

Its now crucial that the major banks respect the Reserve Banks decision and refrain from increasing their interest rates.

 

The Urban Taskforce is a property development industry group, representing Australias most prominent property developers and equity financiers.

 

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