Pre-conditions in place for stronger residential building pick-up but further rate cut may be needed: Glenn Stevens

RBA governor Glenn Stevens has raised expectations for a stronger residential building recovery as well as the likelihood that there will be further rate cuts.

In a speech in Melbourne last night, he said the bank’s main concern was keeping inflation in check while ensuring sustainable growth and pointed out that it was “prudent to sit still for the moment”.

But he indicated a rosier outlook for the struggling residential building sector, with “some of the pre‑conditions” needed for a stronger recovery in dwelling construction “coming into place”.

“One area of stronger potential demand growth is dwelling construction, which has been unusually weak,” said Stevens in his address to the Committee for Economic Development of Australia (CEDA) Annual Dinner in Melbourne.

“Various explanations have been offered – interest rates too high, housing prices falling, zoning restrictions, planning delays, construction costs, lack of ‘confidence’, all have featured.

“At present, at least some of the pre‑conditions one might expect to be needed for higher construction seem to be coming into place.

“Interest rates have declined, dwelling prices seem to have stopped falling, rental yields have risen, and the availability of tradespeople is assessed as having improved. We have, moreover, seen a rise in approvals to build. So there is some evidence of a turning point, albeit a belated one,” he said.

During the speech, Stevens re-affirmed that the RBA maintained its easing bias and that the decision to leave the cash rate on hold in November was a finely balanced one, with the board assessing whether other areas of domestic demand would start to strengthen as “the peak in the investment phase of the mining boom now coming into view”.

He said the question the Reserve Bank Board tried to answer every month when it sat down to decide the stance of monetary policy is will the net effect of all the different forces shaping the economy (the mining boom peaking, dwelling construction rising, business investment demand subdued, the government aiming for a budget surplus) “mean that aggregate demand rises roughly in line with the economy's supply potential over the next couple of years, or will a significant gap emerge?”

“As of the most recent meeting, as the minutes released earlier today show, the Board felt that further easing might be required over time.

“The board was also conscious, though, that a significant easing of policy had already been put in place, the effects of which were still coming through and would be for a while.

“In addition, the latest inflation data, while not a major problem, were a bit on the high side, and the gloom internationally had lifted just a little.

“So it seemed prudent to sit still for the moment.  Looking ahead, the question we will be asking is whether the current settings will appropriately foster conditions that will be consistent with our objectives – sustainable growth and inflation at 2% to 3%.