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Australia: Drop in building approvals

Drop in building approvals reverses last month's rise

Today's building approvals data for July showed an unexpected 2.3%m/m fall (JPMorgan 3.5%, consensus 0.5%). This follows a revised 2.2% rise in June (previously released as a 0.7% fall - the revisions were due to the receipt of late information on higher approvals in New South Wales and Western Australia). Post these data-revisions, building approvals now have dropped in four of the last six months and have fallen 9% since January; approvals have fallen 3.7% since July 2007.

The biggest drop in approvals in July was for private sector houses, which fell 3.4%m/m; approvals for higher density "other" dwellings fell 2.3%. Performance across the states was mixed - approvals fell in New South Wales, Queensland and South Australia, but rose in Victoria, Western Australia and Tasmania.

The near term outlook for home building remains bleak, owing partly to elevated construction and material costs, and excessive red tape deterring some developments. Also, high interest rates have been weighing on demand for home construction. That said, official interest rate cuts, which should start this afternoon with the RBA's expected 25bp rate cut, should ease the pressure, assuming the official rate cuts are passed through to bank mortgage rates, which seems likely.

Similarly, population growth is accelerating, mainly via higher skilled migration, which means demand for housing should improve over the medium term. Indeed, the bottom line for home construction is that Australia needs something close to 170,000 new dwellings to be constructed each year to meet underlying demand. At the current low rate of building approvals, we are on track to build just 150,000 homes. Clearly, therefore, Australia is not building enough homes to meet underlying demand. This "under-building" explains why residential rents are soaring and why house prices in the major cities have held up, despite abrupt increases in mortgage interest rates this year, and record low housing affordability.


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