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Reserve Bank of Australia Deputy Governor Guy Debelle said the construction activity is set to continue its downward trend and the effect on the broader economy is somewhat more than expected.
Much of the downturn in construction activity is still ahead, he said in a speech on Thursday. "We are forecasting a further 7 per cent decline in dwelling investment over the next year, and there is some risk the decline could be even larger."
This would cut about 1 percentage point from GDP growth from peak to trough, he noted.
"The effect of the downturn in housing construction on the broader economy, though, is likely to be somewhat larger than 1 percentage point given the linkages the sector has with other parts of the economy," Debelle added.
One other area where the spillover from housing to the rest of the economy has been larger than expected is its impact on inflation, he observed.
The growth in demand without a meaningful supply response will lead to a larger price response. "From a financial stability perspective that is not so much an issue if it is not accompanied by a material expansion in borrowing," the banker said.
On monetary policy, Debelle said the RBA has taken into account the expected evolution of the housing cycle. The rate cuts will help to make more assured progress towards both full employment and the inflation target.
