The Reserve Bank of Australia (RBA) is looking beyond the immediate numbers to what the economy will be like in 2006.

At BIS Shrapnel's half-yearly economic and building forecasting conference in Brisbane on 8th March 2005, director Robert Mellor said Australia could expect another 0.25% rise in the June quarter. Then the RBA would sit on it's hands until November when there would be three quarters of inflationary results. He expects rates to reach about 8% by December and 8.5% by June 2006. That is up 2% since 2003.

He said the residential housing would be regarded by the RBA as collateral damage in an effort to keep inflation low. He stated the building industry's prospects by pointing to four key drivers of the market.

The first was that Queensland's new residential building would not see a significant resurgence this year. Perhaps there would be a marginal upturn mid-year, but overall it will be much weaker than expected.

"Interest rates are expected to rise to about 7.6% by mid year
and as high as 8.6% by June 2006."

The owner-occupier market will be restrained by affordability. This will be a major constraint in Queensland due to the rise in construction costs and house and land prices from 2001 to 2004.

Delays in the starts of office construction will lead to a 22% decline nationally this year.

This figure is worse than expected due to weaker employment growth in the professional arena. He predicts building commencements to be down 5% nationally and the weakness to be across all sectors - new dwellings, residential alterations and additions and non-residential buildings.

The significant softening of residential alterations was something to look at, as people were still interested in comfort but were more realistic about building additions if it was not going to result in capital growth. Another market driver was that purchasers wanting to upgrade their houses had declined. He said housing affordability has been challenged for new and established houses.

Land scarcity and high building costs had seen a shift in demand from houses to medium density. Smaller house holds due to social and economic factors were driving the medium density market.

Focus had been on the exit of investors from the market, especially in Sydney and Melbourne due to the collapse of the inner-city high-rise apartment market. Detached (stand alone) houses are driven more by owner-occupiers than by investors. What has fallen is affordability. Residential markets have slowed so the decision to upgrade has been put off.

Housing finance and affordability are critical factors, it has had a huge impact on the market in the past 12 to 18 months. The underlying demand is much stronger than previous downturns. The market will survive a rate rise of 8% but after that it will have an impact. Affordability is a critical issue.