Australian dwelling approvals weaken: Matthew Hassan

EXPERT OBSERVATION

Dwelling approvals were much weaker than expected in Oct, recording an 8.1% pull back from September's 7.2% gain.

The Consensus had been looking for a milder 1% fall. The fall takes total monthly approvals back near their July cycle low, down 23.6%yr.

The detail was particularly disappointing – rather than a high-rise driven result, weakness in the month was more evenly spread across all dwelling types, detached houses down 11%, mid-low rise unit approvals down an estimated 4.7% and high rise approvals down an estimated 14%.

The renewed weakness in non high rise segments is despite tentative signs of stabilisation in recent months and firmer reads on construction-related finance approvals. These segments are also expected to be more responsive to recent interest rate cuts and the pick up in house prices.

The state detail showed weakness was concentrated in NSW and Qld with other states posting solid gains.

NSW was particularly weak with total dwelling approvals down 16%mth to a 7yr low. Qld approvals fell 10% in the month but look to be chopping around a steadier underlying trend. Vic posted a 5.7% rise but also looks to be stable in trend terms. WA approvals rose 11.5%, off a very weak Sep, and SA rose 14.7% with an uptrend in place.

The total value of renovation approvals declined 2.6%, mostly reversing a 3% gain in Sep month, and still tracking a slight trend decline.

The total value of non res building approvals rose 4.2% but was coming off a very choppy Aug-Sep. Approvals are up strongly on a 3mth basis but tracking about flat in monthly trend terms.

Overall the Oct dwelling approvals report highlights the weak outlook for new dwelling construction. High rise segments look susceptible to further declines and non high rise is still softening despite rate cuts and the improved tone to markets since mid year.

Falling dwelling investment is set to be a continued drag through 2020 – we expect new dwelling investment to be down 11.5% for the full calendar year 2019 and is forecast to fall a further 8% in 2020.

The weakness stands in stark contrast to the rebound coming through in prices (see here for more detail on the latest price data) but reflects the long lags on high rise projects and the specific issues facing this particular segment that are likely to preclude a rebound in high rise activity. Price gains are also expected to moderate as we head into 2020 as supply starts to lift and as affordability strains re-emerge. 

Read full report: 'Australian dwelling approvals October' (PDF 319kb)

Matthew Hassan is a Senior Economist at Westpac.