House construction costs hit record high

Producer prices; Private sector credit

The “final demand” component of producer prices (business inflation) rose by 1.1 per in the September quarter – the most in 8 years – to be up 2.9 per cent on a year ago, the strongest annual growth rate in a decade.

Private sector credit (effectively outstanding loans) rose by 0.6 per cent in September to be up 5.3 per cent on a year ago – the strongest annual growth rate in 3½ years.

Producer prices – September quarter

• In recent trading updates and surveys, Aussie businesses have reported that Covid-19 related supply chain disruptions, semiconductor scarcity, port bottlenecks, soaring shipping costs, spiking commodity prices, elevated food prices and labour shortages have all increased input and supplier costs. While most businesses are absorbing higher costs, profit margins are being squeezed.

• Rising supplier costs could eventually be passed on to consumers in the form of higher goods and services prices as pent-up demand lifts, supported by elevated household savings, following the end of lockdowns in the south-east.

• Today’s producer prices data shows that the global supply-side price shock is now feeding into upstream inflationary pressures in Australia, heaping pressure on central bank policymakers who are reluctant to lift interest rates. In fact, the “final demand” component of producer prices (business inflation) rose 1.1 per in the September quarter – the most in 8 years – to be up 2.9 per cent on a year ago, the strongest annual growth rate in a decade.

• Aussie house construction costs hit record highs (series from 1966) in the September quarter. A combination of strong demand for new homes and renovation work due to record low interest rates, the government’s HomeBuilder stimulus, and state government grants have generated strong building activity. Input prices to house construction soared 8 per cent over the year to September amid supply constraints and rising freight costs, with timber, board and joinery prices surging 12.2 per cent and metal products up 8.8 per cent.

• According to the Australian Bureau of Statistics (ABS), the main contributors to the quarterly growth in final demand were:

“Heavy and civil engineering construction (+2.1 per cent), due to rises in wages and materials supported by increased public sector investment stimulus.

Output of building construction (+2.2 per cent), due to builders continuing to pass through increases in material and trade prices, supported by continued strong demand for housing.

Petroleum refining and petroleum fuel manufacturing (+11.8 per cent), due to rising global crude oil demand and delays in OPEC+ oil agreement to raise production.”

• Offsetting the rise were price falls in:

“Accommodation services (-5.5 per cent), due to decreased domestic travel demand, resulting from COVID-19 restrictions and border closures throughout the quarter.”

Private sector credit – September

• The latest Reserve Bank financial aggregates were issued today. Private sector credit (effectively outstanding loans) rose by 0.6 per cent in September to be up 5.3 per cent on a year ago – the strongest annual growth rate in 3½ years.

• New home lending demand eased during the recent Delta lockdowns with the pace of home price growth slowing. But housing credit growth held-up in the September quarter. In fact, housing credit lifted by 0.6 per cent in September to be up 6.5 per cent when compared to a year ago – the strongest annual pace in almost 4 years.

• Owner-occupier housing credit jumped by 0.7 per cent in September to be up 8.7 per cent on a year ago – the strongest annual growth rate in 5 years. And investor housing credit rose by 0.3 per cent to be 2.4 per cent higher on a year ago – the strongest annual rate in 3½ years.

• With lockdowns appearing to have limited impact on the property market, policymakers are keeping a close eye on elevated household mortgage debt levels and investor lending demand as home prices continue to lift. Already expectations are growing that a further tightening of macro-prudential policy will be required over the coming year.

• In October, the banking regulator APRA announced changes to mortgage serviceability guidelines that increased the minimum interest rate buffer banks needs to use to assess new borrowers’ ability to meet loan repayments.

• Elsewhere, personal credit fell by 0.6 per cent in September to be down 5.3 cent over the year with Aussies continuing to deleverage during lockdowns, supported by excess savings.

• Business credit lifted 0.7 per cent in September to be up 4.6 per cent over the year – the strongest pace in 15 months. Business credit has lifted with firms increasing their borrowing to support cash flows through the lockdowns.

• The M3 money aggregate lifted by 1.2 per cent in the month to be up 7.8 per cent from a year ago. Broad Money rose by 1.3 per cent to be up 7.9 per cent from a year ago.

Published by Ryan Felsman, Senior Economist, CommSec