Key Points

• Interest rates may stay higher for longer, with the RBA warning that inflation remains above expectations and another rate rise is possible.
• Construction costs and borrowing pressures remain high, putting further strain on project feasibility, pricing and cash flow.
• NSW business confidence recording the largest decline nationally and raising concerns about investment and new project activity.
• Industrial property remains a bright spot, with developer interest almost double the long-term average, despite softer overall confidence.

 

The RBA is signalling that rates may need to stay higher for longer, just as confidence across NSW's property and construction sector weakens.

The risk of another rate rise on Melbourne Cup Day is real.

Speaking at Citi's Australia and New Zealand Investment Conference in Sydney this week, RBA Deputy Governor Andrew Hauser said the inflation outlook was “materially worse”, partly because of high oil prices. He said it was “pretty clear” inflation would come in above the Bank's forecasts.

He was blunt about the risk of businesses treating 3 to 3.5 per cent inflation as the new normal. “That is the central banker's nightmare,” he said. “We can't allow expectations to shift away from target.”

This comes only weeks after the RBA lifted the cash rate to 4.60 per cent on 29 September.

What the RBA Is Telling Us

The Minutes of the RBA Monetary Policy Board's October meeting point the same way. The Board found that:

• global inflation pressures from energy and AI-related investment are stronger than expected
• Australia's supply side is more constrained than previously thought
• productivity growth is too weak for inflation to return to target easily
• a structural rise in the neutral interest rate may mean policy is less restrictive than it looks.

That last point matters most for our industry.

The neutral rate is the level at which interest rates neither hold the economy back nor push it forward. The RBA now thinks that level may have moved up for good. The reasons include higher government debt, huge investment needs in energy, data centres and housing, an ageing population and shifts in global savings.

Put simply, rates that look high may not be doing as much work as we think.

That means inflation will be harder to bring down, rates are likely to stay higher for longer, and any cuts will be smaller and slower than markets hope. For builders and home buyers, the cheap money of the 2010s is not coming back any time soon.

 

Unemployment Rises

The unemployment rate rose unexpectedly to a five-year high of 4.7 per cent in September (4.6 per cent in trend terms). It is now well above the RBA's August forecast.

Some commentators have taken this as a reason to hold off on another hike. Mr Hauser was not one of them. He described the result as “a little weaker than we and others have been expecting” and added, “I stress the ‘little’.”

He also made the RBA's position clear: “We need to see some easing in the economy.”

Think about that for a moment. The central bank is telling us it wants a softer labour market to get inflation under control. For an industry already dealing with high costs and tight margins, that is a sobering message.

Confidence Is Slipping

The NAB Monthly Business Survey shows business confidence fell for a third straight month in September, to its weakest level since May.

NSW recorded the largest fall in the country. Confidence dropped 35 points to -17, now the weakest of any state.

Confidence in commercial property also eased in the September quarter. The 12-month measure fell 10 points to +10, and the two-year measure fell 6 points to +33.

The share of developers planning to start new projects in the next six months eased to 45 per cent, just below the series average of 47 per cent. Industrial is the bright spot. The share of developers targeting industrial property rose to 27 per cent, almost double the long-run average of 14 per cent. There were small increases among those targeting residential (59 per cent) and retail (8 per cent).
 

What This Means for Members

We are already seeing good projects stall under the weight of higher borrowing costs and weaker confidence. NSW is feeling it more than anywhere else.

Members should plan for rates staying higher for longer and build that into feasibility, pricing and cash flow now. Master Builders NSW will keep making the case to government that the answer to inflation lies in boosting supply and productivity, not simply waiting for higher rates to do the job.
 

Matthew Pollock

Chief Executive Officer, Master Builders New South Wales