Construction going strong, floating and fixed rates stable - economist

by Ksenia Stepanova12 May 2021

Longer term interest rates are now rising thanks to a recovering economy, Westpac economists have said - however, floating and shorter-term fixed rates are likely to remain more stable over the coming months.

Westpac acting chief economist Michael Gordon said that three to five year fixed-term mortgage rates are likely to be the least expensive option for borrowers as opposed to taking a shorter term rate now, and refixing it later. However, he says ‘the advantage is narrowing.’

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Coming out of a ‘tourist-less’ summer and into a period where we would normally see an outflow of visitors, Gordon said we can expect to see a “stronger pulse to the data” over the coming weeks, and business confidence is likely to rise. He says construction is also going strong, with ‘significant progress’ being made on addressing the shortage in supply.

“One part of the economy that is already running full steam ahead is the construction sector, and especially homebuilding,” Gordon said.

“The latest residential consents data reinforced that trend – consents rose by 18% in March, reversing most of the drop in the previous month. The number of consents granted over the last year reached more than 41,000, a new record high.”

“The strong pace of building activity, along with the drop in migration-led population growth, means that the industry is now making significant progress on addressing the housing shortage,” he explained.

“We expect that strong pipeline of work to continue even as house price inflation cools.”

When it comes to property investors, Gordon says the full impact of the government’s changes to housing policy is still ‘unclear.’

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“The plan is that investors will still be able to deduct interest from their taxable income for a certain period if they buy a new build rather than an existing house,” Gordon said.

“That could make new builds quite appealing to property investors, but they may be reluctant to jump in until they know how long the exemption will be.”

“Ahead of the Budget release on 20 May, the Finance Minister has indicated that this will leave room for both increased spending allowances and a reduction in borrowing requirements over the next few years,” Gordon concluded.

“We will provide our preview of what to expect from the Budget later this week.”

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