He said it is “inevitable” more large developers will collapse in the coming months, following a host of other marquee Aussie construction companies who have been unable to survive in the current market.
“The concern that interest rate rises bring is that it softens the property boom, or eradicates it to a point where the purchaser is worried that the value of their property is not continuing to rise, and in fact may well decline,” Spring said.
That fear, he said, could see end users pulling out of property deals, banks approving fewer mortgages and investors retreating in caution.
“Prices may start to falter even more quickly,” he said.
“For developments in the process of construction at the moment, if they’ve got pre-sales in place, what’s the risk now of those pre-sales actually completing?”
Spring said he’d heard an increasing number of stories of developers approaching buyers to ask for more cash so homes or apartments could be completed.
“At what point is there a tipping point where you say, ‘Well, in actual fact, I can’t make money anymore and I’m not going to complete on these projects’.
“And then if the sale falls through, what’s the developer doing with that property?
“They have to take it back to the market, that puts excess supply in, and does that drive prices down as well?”
AMP Capital, which described the hike to 0.35 per cent as “above market expectations”, forecast the RBA cash rate to hit 1.5 per cent this year, and 2 per cent by the middle of 2023.
“That is obviously going to dent consumer confidence, and therefore (we) may well see the rush towards buying a property subside, which will at least hold any increase in property prices and potentially put downward pressure on prices,” Spring said.
He said the issues of material costs and labour shortages “are only really worsening” in 2022, in large part because of massive demand caused by catastrophic flooding in New South Wales and Queensland, and ongoing heavy rain events.
The cost of building materials rose between 15 to 20 per cent throughout 2021.
“When there’s super demand, obviously prices are going to increase,” Spring said.
“That’s another explanation as to why this is something that has been on the cards, we’ve created an inflationary environment, interest rates have to follow to deal with that, and it’s all putting pressure on this one industry.”
Thanks to blowing out costs, pre-negotiated contracts were unviable and pushing developers to the brink, with some already toppling over.
“It’s inevitable there’s going to be a lot more insolvency in the construction industry,” Spring said, which will inflict a “domino effect” on builders, subcontractors and trades.
AMP’s chief economist Dr Shane Oliver predicted rising interest rates would cause home prices across Australia to fall 10–15 per cent by early 2024.
The RBA would only raise rates “as far as necessary” to cool inflation, Oliver wrote in a market note, following last week’s RBA decision.
“It won’t be on autopilot mindlessly hiking and crashing house prices and the economy in the process,” he continued.
“Rather, after a few initial hikes, it will likely pause to see what happens before doing more, but rates will not rise to nosebleed levels.”