If there’s one thing that could make our Reserve Bank hesitant about raising interest rates, it will be the news that the building industry has seen a run of construction company collapses since the failure of Bathla. Insolvencies in the sector hit a record 941 in August, which could be a prelude to a wider problem for the overall economy.
And that’s going to be a big discussion point for the RBA board before it hands down its highly anticipated interest rate decision on September 29. This ‘builders in trouble’ news comes as some economists are predicting we’ll see three interest rate rises before the central bank decides we have had enough hip-pocket harassment!
These construction company collapses are a real world fallout of the May Budget, which with its property tax changes, has created what is largely being called by industry experts: a housing crisis! This not only has brought problems for builders but with the house price falls is expected to lead to a substantial negative net wealth effect. This shows itself as reduced consumer spending that ultimately leads to sales challenges for businesses, which in turn leads to price and job cuts.
If it continues, these building collapses could be sowing the seeds of a crop we don’t want to harvest, namely a field of bankruptcies that ultimately ends in recession. This economic outcome is a consequence of government policy failures that the International Monetary Fund addressed this week.
This is how the SMH’s Shane Wright reported the story: “The Albanese government has been urged to slash business red tape and lead a sweeping overhaul of federal and state taxes, with the International Monetary Fund warning without more change, Australian living standards will continue to stagnate.”
According to Wright, the IMF said Australia “had started this year from a position of economic resilience with strong jobs growth, robust business investment led by the tech sector and high public infrastructure spending.”
And while the Albanese Government might want to blame the Iran war and the oil price spike for its inflation and now recession threat problems, a more astute analysis, might pose the question whether it timely to cook the construction sector in the May Budget?
Insolvency luminaries think there is a negative multiplier effect coming out of these building company collapses and it’s bound to create more failures. And because the Bathla fallout involves 2,500 homes under construction, the centre of this crisis will fall on the country’s biggest economy, namely New South Wales, which is the lender of last resort by running the Home Building Compensation Fund.
All this is happening as all state governments are faced with falling revenue because stamp duty from home sales is a major source of revenue for their treasurers. History has shown that as property stamp duty revenue falls, payroll tax collection becomes crucial, which means small and medium-size businesses could be in for a shock from the state revenue offices around the country.
This isn’t a pretty economic picture and an interest rate hike at the end of the month will only make it a whole lot uglier for consumers and businesses, who not only rely on the former but are also straddled with debt, often bankrolled by the value of their homes, which are now falling.
We’re entering a crucially important time for the economy, householders and business owners, where leadership from our governments, federal and state, is critical but it places a lot of pressure on the RBA to get their rate rise decisions right.
For the non-economists out there, when a central bank raises interest rates, they rely on something called the transmission mechanism to make consumers and businesses slow down spending to reduce inflation. However, as economic textbooks will tell you, the effects of rate rises can take a long time until they actually bite to make people change their spending habits and positive expectations.
The combined effect of the three rate rises, on top of the Budget’s housing crisis creation and the oil price effect of Trump’s Iran war, has put a big bite on the mortgage belt and business owners, and I hope the RBA board considers all this on Tuesday week, when we’ll hear about their latest interest rate decision.
When interest rates were driven down during the pandemic to record lows, fuelling reckless lending and borrowing and, sadly, providing ultra low returns for those with capital to lend, everyone thought the party would never end. Now that rates are returning to what should be regarded as a neutral position (not tightening), the whole world is going to fall in. Sorry, but the correct pricing of capital is an essential component of rewarding savers and providing access to loans that DONT encourage reckless lending and borrowing.
Good, well run, financially secure builders will always survive. Those going to the wall only have themselves to blame, with many over extended and leaving sub contractors and other creditors out of pocket, in many cases for hundreds of thousands of dollars or more. Don’t blame interest rates on this!
The reason for having business people on the RBA board is that they are fully up to date with what is happening in the economy. A retailer knows his number for that week. So does a builder or an estate agent.
A panel of so-called experts does not and cannot get this information.
No *loody wonder that they are lurching about on month old or worse information
You are correct in suggesting that the economy already has sufficient negative influences to curb consumption. Because interests costs contribute to production costs, rises in interest rates are obviously inflationary from the producers point of view. However, the intended consequence is that increases in rates reduce discretionary expendable income and therefore by reducing consumption, prices are expected to decline.
What actually happens is that declining profit margins combined with reduced demand force producers to reduce their production, thereby increasing unemployment. Rather than fixed arbitrarily by bureaucrats, credit, (the cost of cash… ie interest) should be naturally adjusted by variations in the supply and demand for credit.
As always …rational Peter Switzer comment.
Are you listening “Dr” (NOT of economics) Chalmers?
You cannot blame the RBA for increasing the interest rates, unfortunately we have an incompetent Prime Minister and Treasurer who have no idea what they doing to our country. Socialist with no business background have caused this with taxing the people who are the drivers of our economy. No wonder we are in such a mess.