Australia: building approvals start 2010 poorly

Australia: building approvals start 2010 on a bad note

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Residential building approvals plummeted 7%m/m in January (J.P. Morgan -2.0%, consensus 1.0%), having registered positive growth in each of the previous four months. Private sector building approvals for detached houses were up a very modest 0.3%m/m, while ‘other’ (i.e. higher density) dwellings slumped 29%.

Clearly, the winding down and expiration of the expanded First Home Buyers’ (FHBs’) grant has taken some wind out of the sails for house approvals, which are still 4% below the peak registered in October 2009. The tripling of the FHBs’ grant in October 2008 to A$21,000 for the purchase of new dwellings certainly was a driving force behind improved construction activity in houses over 2009.

Approvals for higher density dwellings fell dramatically in January, although, as we have often noted before, the volatility of this series makes it difficult to draw broad conclusions from any particular month’s data. The 29%m/m fall in approvals for higher density dwellings does mean, however, that trend growth in this category has now been falling since September 2009, and now is sitting at a meager 1.6%m/m. The continuation of fluky financial conditions for developers clearly is still posing difficulties for financing these larger scale projects.

The return to a pre-FHBs’-boost environment, after the expiration of the expanded grant at December 31, will be a significant test for the housing market. The key question is whether the momentum garnered over 2009 will be sufficient to withstand emerging structural and policy-induced headwinds. Price caps on the basic FHBs’ grant of A$7,000 applied from January 1, a vacuum of demand likely awaits after the stimulus-induced bounce of 2009, and private research has indicated a significant rebound in sell-side activity over the last few months. The long-run under-supply of housing notwithstanding, short term dynamics are realigning somewhat, which should ease price pressures (or at least trim excess price growth) and calm speculative activity.

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The value of building approved fell yet again in January, down 25%. The result was substantially influenced by a collapse in the non-residential category, which declined 42% over the month. Again, as in the last few months, the footprint of the diminishing profile of government infrastructure projects in the health and education sectors dragged down this category.

ENDS

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