He said it was ‘inevitable’ that more big developers would collapse in the coming months, following a host of other big-name Australian construction companies that were unable to survive in the current market.
“The concern about rising interest rates is that it will dampen or eradicate the housing boom to such an extent that the buyer fears that the value of their property will continue to rise and that they may actually decline,” Spring said.
That fear, he said, could see end users withdraw from real estate transactions, banks approve fewer mortgages and investors cautiously withdraw.
“Prices could start to weaken even faster,” he said.
“For the developments that are being built right now, if they have presales in place, what’s the risk now that those presales will actually end?”
Spring said he has heard a growing number of stories of developers approaching buyers asking for more money so homes or apartments can be completed.
“At what point is there a tipping point where you say, ‘Well, actually, I can’t make any more money and I’m not going to finish these projects.’
“And if the sale fails, what does the developer do with this property?
“They have to bring it back to market, which creates oversupply and does that also drive prices down?”
AMP Capital, which called the rise to 0.35% “above market expectations”, forecasts the RBA’s cash rate to reach 1.5% this year and 2% by mid-2023.
“This is obviously going to shake consumer confidence, and as a result (we) may well see the rush to buy property subside, which will at least keep house prices up and potentially exert a downward pressure on prices,” Spring said.
He said material cost and labor shortage issues are “only getting worse” in 2022, largely due to massive demand caused by catastrophic flooding in New South Wales and in Queensland, and ongoing heavy rains.
The cost of building materials has increased by 15-20% throughout 2021.
“When there’s super demand, prices are obviously going to go up,” Spring said.
“That’s another explanation of why this is something that’s on the cards, we’ve created an inflationary environment, interest rates have to follow to deal with that, and all of that puts pressure on this one industry.”
Thanks to exploding costs, pre-negotiated contracts were unsustainable and pushing developers to the brink, with some already collapsing.
“It’s inevitable that there will be a lot more insolvency in the construction industry,” Spring said, which will inflict a “domino effect” on builders, contractors and trades.
AMP’s chief economist, Dr Shane Oliver, has predicted that rising interest rates will cause house prices in Australia to fall by 10-15% by the start of 2024.
The RBA would only raise rates “to the extent necessary” to calm inflation, Oliver wrote in a market note, following the RBA’s decision last week.
“It won’t be on autopilot of the reckless rise and fall of house prices and the economy in the process,” he continued.
“Instead, after a few initial hikes, it will likely pause to see what happens before doing more, but rates won’t reach nosebleed levels.”
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