Rate cuts fails to lift building approvals

THE reduction in interest rates has failed to lift confidence, building approvals slumped a further 5.4% in October for the fourth consecutive month, according to the Australian Bureau of Statistics.

Approvals fell 7.2% in September following the Reserve Bank’s first 25 basis points interest rate cut to 7.00%.

In October, the RBA reduced rates by 1.00% to 6.00% and just 10,730 dwelling units were approved – down 26% when compared to the same period a year ago. Private sector house approvals slumped 2.7% to 7,507 units and apartment approvals fell 11.4% to 2,916 units.

ANZ Bank’s economist Dr Alex Joiner said the two interest rate cuts were not enough to bolster confidence.

“The building industry is clearly suffering from a crisis of confidence as property market activity dries up in an environment of heightened economic uncertainty. This fall in approvals may heighten some of the downside risk to dwelling investment in the fourth quarter.

“However, building approvals do have a strong historical relationship with cuts in interest rates and we expect that the 300bp worth of cuts should see falls in building activity bottom out in coming months.

“The first home owners grant, that encourages the purchase of newly constructed homes, should help this cause. Further, in data released earlier in the week we saw record inward overseas migration into Australia. Net new arrivals in the year to June came in at well over 200,000 new residents, so there is no doubt the underlying demand for housing continues to be strong,” Dr Joiner added.

The value of total building approved fell 19.4%, down 7.5% in new residential building whilst the value of alterations and additions fell 7.5%, and the value of non-residential building fell 34.4%.

JPMorgan’s economist Helen Kevans said the downtrend in the number of building approvals should continue amid low confidence, elevated construction and material costs, excessive red tape in the building sector, and persistent funding pressures – which intensified in October due to the onset of the worst of the global financial crisis. So, while the series remains highly volatile, the near-term outlook for the building sector remains poor.

“In February, when the RBA Board next meets, we expect another 50bp rate cut, and then another 25bp shift lower in early March. These moves will take the cash rate to 3.5%, which will believe is the terminal cash rate in this current easing cycle,” Kevans said.

On a state by state basis, Queensland was the worst performer approvals fell 25.9% followed by South Australia which fell 16% and Victoria, down 3%.

Approvals rose in New South Wales by 7.3%; Western Australia rose 2.9% and Tasmania increased 0.6%. There was data available for Northern Territory and ACT.

Australian Property Journal