Findings in our Q1 2023 Greenfield Market Report show that alongside construction costs stabilising, the RBA’s decision to leave the cash rate unchanged in April drove the Westpac Melbourne Institute Consumer Sentiment Index, in particular the the time to buy a dwelling index, to rise, albeit from long term lows. These measurements are generally leading indicators of consumer behaviour, and any sustained rise should translate to a boost in new home demand, although we don’t anticipate any substantial sentiment lift until interest interest rates remain unchanged for several consecutive months. The largely unexpected rate rise in May will undoubtedly impact sentiment, destabilising already fragile confidence in forward planning for household finances

While the possibility for future cash rate rises persists (and in fact, one more rise is highly likely in the coming months), consensus is growing around the cash rate reaching its peak. While the RBA is maintaining its defensive stance, given inflation remains well above the target range of 2% to 3%, inflation growth is starting to recede. If this trend continues through 2023, the justification for raising the cash rate will also subside.

Tellingly, some bank and non-bank providers of residential finance have started to lower their fixed home loan rates, indicating the rising interest rate cycle is nearing an end.

Low sales activity since mid-2022 is starting to alleviate upward pressure on construction costs by reducing the demand for both building materials and labour. In response, the Melbourne CPI Index for new dwellings purchased by owner occupiers declined 0.9% in Q1 2023.

Nevertheless, both interest rates and construction costs are likely to settle at current elevated levels, preserving affordability concerns. The fallout from recent high profile collapses among residential building companies is also likely to encourage more caution among buyers. This will reinforce the importance of rebates and incentives in the short term to combat barriers to enter the market, overcome weakened sentiment and support lot sales activity.

This article references findings from our Q1 2023 Greenfield Market Report.