House approvals slump

Home Update Newsletter: April 2011

Author: Savanth Sebastian, Economist, CommSec

The outlook for home builders is gloomy. Council approvals to build news homes slumped by 15.9 per cent in January. In annual terms approvals are down 24.8 per cent on a year ago.
The floods certainly played a part in the weak result but excluding Queensland new dwelling approvals still fell by 13.3 per cent in January.
The all-important private sector new house segment fell by 2.4 per cent in January, holding at 22 month lows.
Australia’s trade surplus narrowed by $143 million to $1,875 million in January – modestly above expectations. Australia has chalked up trade surpluses of $21.1 billion over just the past ten months.
In February, 80,896 vehicles were sold, down by 1.6 per cent compared with a year ago. In seasonally adjusted terms CommSec estimates that sales eased 0.5 per cent in the month.

What does it all mean?

The recent improvement in building approvals has certainly been short lived. After encouraging signs in December dwelling approvals have slumped by almost 16 per cent in January and in annualised terms approval are now down over 24 per cent on a year ago.
It could be argued that the wet weather and in particular the floods in Queensland has been the key driver behind the weak result. Especially given that Queensland approvals fell by almost 30 per cent in January to the lowest level in records going back 28 years. But even if you exclude Queensland, approvals slumped by over 13 per cent. In fact approvals fell across all states in seasonally adjusted terms – highlighting the current weakness in housing activity.
There is no doubt that the building approvals series tends to be volatile especially given that apartment approvals, tend to be lumpy. And it is important to note that the January figures are likely to be revised in coming months, given the flooding. However the ABS has highlighted “that flooding in the eastern states, particularly Queensland, and other recent natural disasters have not adversely affected participation by providers in the Building Approvals collection or the quality of estimates in this release”.
And while revisions are likely to take place, it is clear that there is an underlying level of weakness in housing activity. Not only is overall building approvals plummeting but the all important private sector new house segment fell once again in January and is holding at the lowest levels in 22 months. No doubt the November rate hike is only starting to filter through the data and our concern is that the weakness could remain in play for the next few months.
It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent.
The economy may be going through a soft patch but the dollars keep rolling in. Australia has now notched up its tenth consecutive trade surplus, totalling in excess of $21 billion. Despite the boost to Australian coffers the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
However as the Reserve Bank has highlighted, increased savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.
More importantly, while the floods in Queensland have had a detrimental impact on coal exports it seems this has been partially offset by higher prices. And given the ABS did not encounter any significant issues in collating the data, any sizeable downgrade in the size of the surplus is unlikely to take place in coming months. Even more so, healthy surpluses are likely to be part of the landscape over coming months provided the weather doesn’t take an extreme turn for the worse.

What do the figures show?

Building Approvals:

New dwelling approvals fell by 15.9 per cent in January, after rising by 10.0 per cent in December. Dwelling approvals are down 24.8 per cent on levels of a year ago.
Excluding Queensland new dwelling approvals fell by 13.3 per cent in January.
House approvals fell by 3.3 per cent in January (private sector down 2.4 per cent), after sliding by 0.4 per cent in December. Apartment approvals fell by 32.4 per cent in January (private sector was down 30.8 per cent) after rising by 27.4 per cent in December. In annual terms apartment approvals are down 24.8 per cent on a year ago.
Dwelling approvals fell in all states with Tasmania (down 34.9 per cent) faring worst followed by Queensland (down 29.9 per cent) and South Australia (down 20.9 per cent) in January.
In annual terms approvals across the state: NSW (down 37.5 per cent), Victoria (up 8.0 per cent), Queensland (down 46.2 per cent), South Australia (down 46.0 per cent), Western Australia (down 33.0 per cent), and Tasmania (down 36.2 per cent).
The value of building approvals fell by 26.5 per cent in January and was lower by 28.0 per cent on a year ago.

International trade:

Australia’s trade surplus narrowed by $143 million in January to $1,875 million – marginally above expectations. Exports fell by 4.1 per cent while imports fell by 3.8 per cent. It was the tenth consecutive trade surplus.
Rural exports fell by 1.5 per cent in January while non-rural exports fell by 8.4 per cent.
Within non-rural exports, coal, coke and briquettes fell by 29 per cent. “On a revised recorded trade basis, between December 2010 and January 2011, large value decreases were recorded for the following selected commodities hard coking coal fell $713m (40 per cent) with exports to India down $230m (49%) and China down $149m (53%), driven by decreases in volumes of 47% and 49%, respectively. Semi–soft coal fell $230m (33 per cent). Bituminous (thermal) coal fell $75m (6 per cent.”
Within rural exports meat and meat preparations fell by $82 million or 13 per cent.
Within imports, consumer imports fell by 1.5 per cent in January, capital goods imports rose by 3.2 per cent while intermediate goods imports fell 11.0 per cent.
While the physical trade of goods is in surplus, the services account remains mired in deficit – the deficit widened from $289 million to $377 million in January. The high Australian dollar is a key culprit, depressing tourism receipts.

Car sales:

The Federal Chamber of Automotive Industries reported that 80,896 new cars were sold in February, down 1.7 per cent on a year ago. Passenger car sales were 5.0 per cent lower than a year ago, 4WDs were up 4.7 per cent and “other vehicles” (trucks, utes etc) were up 1.3 per cent. 0.5.0 per cent in February.

What is the importance of the economic data?

The Bureau of Statistics' monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.

What are the implications for interest rates and investors?

The strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s has notched up its 16th consecutive services deficit. The Aussie dollar strength is making Australia a less attractive destination for overseas tourists and potential international students. Interestingly when the Aussie fell below US70c in 2009 the services sector notched up a series of surpluses.
While the housing sector is cooling it is not about to collapse in a heap. The fundamental for property remain attractive. Population growth remains healthy, vacancy rates continue to slide and the employment growth will support activity in the mid to longer term.
The rate hikes have certainly taken their toll on the housing sector over the past year and unfortunately for the sector it is unlikely that a turnaround is going to take place anytime soon. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent.

Savanth Sebastian, Economist, CommSec