Builders Supplant China Driving Growth as RBA Cuts Work

Photographer: Brendon Thorne/Bloomberg

A jogger runs past Lend Lease Group's Barangaroo South redevelopment in Sydney, Australia. Close

A jogger runs past Lend Lease Group's Barangaroo South redevelopment in Sydney, Australia.

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Photographer: Brendon Thorne/Bloomberg

A jogger runs past Lend Lease Group's Barangaroo South redevelopment in Sydney, Australia.

Daniel Klinge is helping Australia shrug off a slowdown in its biggest trading partner China.

Spurred by record-low interest rates, Klinge has added three apprentices, two carpenters and an interior designer to his Brisbane-based home building and renovation company since November, more than doubling the size of his team.

“We’re possibly taking on a couple of major jobs in the next month or two and that basically books us out for the whole year and into next year,” he said. “We’re talking million-dollar renovations that weren’t around 12 or 18 months ago.”

A month of stronger-than-expected economic data has bolstered confidence Australia will withstand China’s slowdown and a drop in mining investment. Reserve Bank of Australia Governor Glenn Stevens today said “we’re going to have a boom in residential construction,” helping spur the Aussie’s climb to a four-month high as the question turns to how long he’ll allow that to go on before he feels the need to tighten policy.

“How long the Reserve Bank waits is the million dollar question ” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney. “Historically, the housing sector has perhaps been the best leading indicator for the economy. It’s the most interest sensitive.” He predicts quarter percentage point increases in September and November.

Rate Bets

Traders are pricing in 16 basis points of rate increases from the current overnight cash rate target of 2.5 percent in the next 12 months, according to a Credit Suisse Group AG index of swaps. That’s up from 3 basis points of cuts seen on March 3, the day before the central bank’s last meeting.

“There is encouraging early evidence that the so-called ‘handover’ from mining led demand growth to broader private demand growth is beginning,” Stevens said in a speech today in Hong Kong at the Credit Suisse Asian Investment Conference. “Putting all this together, we think economic growth will continue, and may strengthen a little later this year and pick up further during 2015.”

The Australian dollar rose after Stevens’s speech to as high as 91.96 U.S. cents, the strongest since Nov. 26, before trading at 91.92 cents at 4:02 p.m. in Sydney.

Twelve of 32 economists surveyed by Bloomberg predict borrowing costs will be higher by the end of the fourth quarter.

Still, Bank of America Merrill Lynch’s Saul Eslake, National Australia Bank Ltd.’s Alan Oster, Goldman Sachs Group Inc.’s Tim Toohey and JPMorgan Chase & Co.’s Stephen Walters are among those still forecasting another rate cut.

They maintain the RBA won’t raise rates when unemployment is still rising. Eslake notes that to date, the translation from a surge in approvals (AUBAY) to build into actual construction activity has been disappointing, attributing the gap to “a higher than average speculative element” in this construction cycle.

Approvals Surge

Approvals to build new dwellings surged 34.6 percent in January from a year earlier, the fifth straight month exceeding 20 percent. By contrast, construction work done fell 1 percent in the fourth quarter from three months earlier, led by a 1.7 percent decline in residential work, government data show.

The central bank cut its benchmark rate by 2.25 percentage points from late 2011 through to August last year as it sought to encourage residential construction and hiring to boost the domestic economy as investment in mining projects ebbed.

Property prices have responded: The average home price in Australia’s biggest cities rose 9.5 percent in the year to Feb. 28, according to the RP Data-Rismark home value index.

The gains are “part of the monetary transmission mechanism,” RBA Deputy Governor Philip Lowe said yesterday in response to a question on whether the central bank was considering measures to cool the market.

Cyclical Upswing

The low-rate led cyclical upswing in property prices “cannot continue indefinitely” and lenders should avoid relaxing standards to boost profits, the RBA said today in its semiannual financial stability review.

“Household gearing and indebtedness remain around historically high levels; hence, with the unemployment rate trending upwards, continued prudent borrowing and saving behavior is needed to underpin households’ financial resilience,” the central bank said in the review.

While Australia’s unemployment rate held at a more than 10-year high of 6 percent in February, the economy added 80,500 full-time jobs that month, the most since just after the country’s last recession in 1991.

In contrast, China’s recent data indicate Premier Li Keqiang may have difficulty attaining his 7.5 percent annual growth target. A Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics dropped for a fifth month in March.

Building Jobs

Signs of Australia’s decoupling from China, its biggest trading partner, are reflected in government data on employment by industry for the three months through February. Of the 50,300 hires over the period, 19,800 were in the construction industry, while 1,900 jobs were lost in mining. From a year earlier, builders added five-time more positions than miners.

“The phone is ringing more, and people are spending more,” said Matthew Earl, general manager of Rossmark, a home building company that operates in areas including Sydney’s southern Sutherland Shire, and who expects interest rates to rise next year. “We’ve increased numbers in the past year by probably 50 percent,” he said of employment in design, council administration and architecture areas of the business.

Unemployment in the west of Sutherland Shire’s was 1.8 percent in the final three months of 2013, the equal lowest level in Sydney, Australia’s biggest city.

In Brisbane, Klinge’s company focuses on affluent areas of the Queensland capital. “People are starting to spend the bigger money again,” he said.

Key Demographic

The key demographic driving the pick up in his business is 35- to 45-year-olds with kids looking to move into a newer home or expand their existing family home from 2 1/2 bedrooms and a bathroom to five bedrooms and three bathrooms, Klinge said.

Stevens this month said he’s not sure how long a flagged period of rate stability will last and doesn’t see the need to further loosen policy.

“Targeting residential construction as part of the growth transition as mining capex rolls off was smart policy,” said Sydney-based Michael Blythe, chief economist at Commonwealth Bank of Australia. “We know how to get housing activity moving. You cut interest rates and wait.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Malcolm Scott, Victoria Batchelor

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