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Supply chains unfurl, home building materials inflation plummets

Media release

Supply chains unfurl, home building materials inflation plummets

Media release
“The cost of home building materials in Australia increased by just 0.6 per cent in the June Quarter 2023, compared with the 4.3 per cent peak in the same quarter last year,” stated HIA’s Chief Economist, Tim Reardon.

The Australian Bureau of Statistics last week released its producer price indexes for a range of industries, including mining, manufacturing, construction, and services industries.

“Last week’s data brings the annual rate of increase for home building materials prices to 7.4 per cent in 2022/23, down from 17.3 per cent in the previous financial year,” added Mr Reardon.

“Supply chain disruptions have driven Australian inflation during the pandemic, primarily through the price of building materials and fuel. As these supply chains unfurled, price pressures eased just as fast as they emerged, if not faster.

“A number of products have even shown outright price declines in recent quarters, including structural timber and plywood and board; metal products like steel beams and sections, reinforcing steel and aluminium doors and windows; and plumbing products like pipes and fittings.

“Building materials price inflation is back to pre-pandemic rates. It is also consistent with other data released last week showing consumer price inflation rapidly declining back towards the RBA’s target range.

“With unfurling supply chains and declining volumes of home building activity set to address most of Australia’s inflation problem, there is little more that the RBA’s interest rate increases need to achieve.

“In May 2022, when rates started to rise, there was a record volume of building work in the pipeline. Even after 14 months of rate increases, this volume of work remains well above pre-pandemic volumes and is likely to stay elevated until at least early 2024.

“This large volume of work has obscured the adverse impact of rising rates, with the first increase in the cash rate in May 2022 yet to adversely impact employment in home building or the wider economy.

“The adverse impact the increase in the cash rate is only now emerging in a slowdown in building activity on the ground, and further rate increases risk a deeper and more prolonged downturn.

“We forecast that in 2024, the number of new homes commencing construction will reach its lowest volume since 2012, the trough that followed the RBA’s last hiking cycle. This will also be one of the lowest volumes of new home starts in the past 30 years. This is contrary to the Australian government’s goal of building more than one million homes over the next five years.

“One in ten Australians are employed in the home building industry.
“In pursuing a reduction in inflation by using monetary policy, the RBA needs to ensure that this cycle’s deep and treacherous lags are fully appreciated as every additional interest rate increase will deepen the coming trough of building activity, and employment in the sector, with little effect on speeding up Australia’s return to its 2-3 per cent inflation target band,” concluded Mr Reardon.

House Construction Input Price Index, Growth Rates

Source: ABS

For more information please contact:

Tim Reardon

Chief Economist

Thomas Devitt

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