Housing Starts In Steepest Decline Since 2000

Housing Starts In Steepest Decline Since 2000

The number of housing starts slumped 9.9%q/q in 4Q, after falling a revised 8.9% in 3Q (previously -10.7%). The fall was the largest decline since the September quarter 2000, when starts plummeted 35%q/q owing, in part, to a change in the tax regime. The biggest drop in the December quarter was in starts of ‘other’ residential building, which slumped 21%q/q, driven by a mammoth 54% fall in starts in Queensland. Starts of new private sector houses fell 5% over the quarter.

In the fourth quarter, we believed housing starts would have got some support from the expansion of the first home buyers grant (from October 1), the RBA’s assertive interest rate cuts, and improved affordability. Clearly, though, this was not the case. Housing starts remained under pressure from the lingering impact of the global credit crunch, the dampening impact of excessive red tape in the building sector, and the still sluggish rate of local council approvals. The number of starts, at an annualized 130,000 in 4Q08, therefore, remained well below the level required to meet demand, which we estimate is around 168,000 dwellings per year; the shortfall argues strongly against large house price falls in Australia.

Demand may ease throughout 2009, however. While population growth has accelerated in recent years, this owed mainly to more rapid skilled migration inflows, which the government intends to pare back this year. The supply-demand imbalance, therefore, should start to improve. Moreover, the significant cuts to the official cash rate should help boost housing starts in early 2009. Since September, the RBA has cut the cash rate a colossal 400bp, marking the most aggressive pace of policy easing since the early 1990s. We expect further easing, with our forecast calling for the cash rate to be cut at least another 50bp in this cycle.

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