Reaction to the latest cut in official interest rates amongst building and construction groups in Australia was predictable.
Whilst further rate reductions will be needed, and the onus was on banks to immediately pass on the full extent of the cuts, organisations such as Master Builders Australia and Housing Industry Association said, Tuesday’s cut is a welcome reprieve for builders in difficult times.
At face value, the primary reasons rate cuts are good for builders are obvious. A lower cost of finance helps stimulate housing demand, and lower rates have a direct impact on builders’ bottom line by reducing the cost of servicing company debt loads.
But the good news for the industry spreads beyond the actual cut itself to some of the commentary behind the cut. Principally, the bank said that although appetite for risk remained low, global financial markets had stabilised amid signs of progress in addressing Europe’s financial problems. This means financing conditions for large commercial building and infrastructure projects are improving, an obvious positive for the commercial building sector at a time when public sector building activity is dropping back. Related to this, improving funding conditions in international markets noted by the RBA mean more pressure on the big four banks to pass on the full extent of the cut.
Beyond that, the bank also touched on the softening labour market. Whilst this is awful news for the 35,000 (net) Australian builders who lost their jobs over the past three months, and the scores of residential construction tradespeople who remain in oversupply throughout the country, for building and construction firms it means less pressure on wage costs and less difficulty in finding tradespeople – albeit amid a longer term concern about out of work tradies leaving the industry.
The softening labour market is also feeding through to easing inflation pressures, which in turn increases the likelihood that rates will stay low even if they are unlikely to fall much further.
Granted, not in the RBA’s commentary is positive. Whilst the bank noted continued strong capital spending in the resources sector, there are increasing signs that resource firms are becoming more cautious about approving new projects. And of course, part of the reason for the cut is that builders, along with manufacturers and retailers, are doing it tough.
Furthermore, the general tone of the bank’s commentary does indicate that it will be in no hurry to ease rates further in coming months.
Still, for many reasons, the latest cut is welcome news for the building and construction industry in Australia.