The ties between construction activity and the broader health of the economy are evident following the release of today’s December 2022 quarter National Accounts and monthly CPI figures for January 2023, says Master Builders Australia CEO Denita Wawn.
The annual inflation rate has dropped back to 7.4 per cent from 8.4 per cent in December 2022, and while this may be a sign that inflation may have peaked, it is still stubbornly too high.
“Inflation is a hidden tax on everything. It makes people and businesses poorer by eating our savings and making investments by businesses less attractive. It is particularly bad for construction because of the higher capital requirements for the work we do and how closely construction activity is tied to private sector investment decisions,” said Ms Wawn.
The cost of new homes rose by 14.7 per cent in the year to January as the impact of labour and material costs flowed through. The rate of price growth shows signs of easing, reflecting a softening in new demand and improvements in the supply of materials.
“Rent prices have increased further in January from an annual rise of 4.1 per cent in December to 4.8 per cent in January, reflecting low vacancy rates and a tight labour market. This demonstrates the need for larger volumes of new home building in key parts of the rental market, especially for apartments and units,” said Ms Wawn.
“As inflation rises, fewer projects can be done for the same amount of capital. The interest hikes which follow end up smashing the spending power of consumers.
“We already see these stark impacts in new housing construction. Not addressing the symptoms of inflation now risks these symptoms spilling into other sectors of construction.
“With housing affordability already a major challenge, high inflation threatens to lock a generation out of homeownership and add to housing supply and affordability challenges.
“For commercial construction, inflation is a capacity killer. The vast majority of the money for building projects comes from private sector investment. High inflation makes business investment more expensive and less attractive by reducing returns and increasing the cost of inputs.
“There are more tools in governments’ fiscal tool belts than in the RBA’s. The government needs to take the necessary steps to ensure interest rates do not need to rise any further and take some of the heavy lifting of our correction off mortgage holders and business owners.
“The upcoming federal budget should focus on policies that improve productivity in the industry and allow for more favourable outcomes when it comes to the cost, quality and quantity of building and construction output.
“The pain of higher interest rates and high inflation is real and if we do not get it under control we could be in for a lengthy period of pain and depressed construction activity,” said Ms Wawn.
