The Australian construction/housing sector finally managed to climb out of its slump as building approvals rose 1% in July snapping a three month streak in which approvals have declined. June for instance saw a 3.6% decline, and in May approvals fell 6.3%. Despite the positive gain, the headline reading, as well as the annual change in approvals came in weaker than the consensus forecast of 2.0%.

The report therefore shows us that there is not much strength in the housing and construction sector, and that those sectors are not going to be adding much to growth in the coming quarters. Weak housing will put pressure on the RBA to hold rates steady for longer, or to consider cutting rates to help stop the recent malaise in housing.

Here's a graph of building approvals, and we see the clear downtrend over the last year in approvals.


Here's some commentary from around the web on the release:

From Bloomberg: With the likelihood of interest-rate hikes easing through July and market fundamentals continuing to exert pressure on the undersupply of housing, pent-up construction plans are expected to flow through July building approvals, David Cannington, an economist at Australia & New Zealand Banking Group Ltd., wrote in a research report before today's data.

From Sydney Morning Herald: These were a little weaker than we expected, said Macquarie economist Ben Dinte. It comes off a period of consistently falling building approvals so it's really just stabilisation at pretty soft levels rather than an indication of things picking up.

Taken with weak home loan data, building approvals will probably remain flat over the rest of 2011, said Mr Dinte. The real estate market has shown signs of strain this year, posing risks for employment growth in construction and as well as bank earnings in the months ahead.

Data yesterday showed that new home sales have fallen to a 10-year low in July, according to the Housing Industry Association, dropping 8 per cent in July, following an 8.7 per cent fall in June.

Home prices, on a seasonally adjusted basis, have sunk 2.7 per cent in 2011 so far, according to RP-Data-Rismark, after rapid run-ups since 2008, making the purchase of property less attractive.

From HIA: Twelve months of trend decline in approvals in part reflects the weak business and consumer sentiment that exists in the non-resource economy at the moment, said Andrew Harvey.

However, this weaker environment does bring with it a couple of upsides for potential homebuyers. Increasingly, the RBA has no option but to either cut rates or keep them on hold for a sustained period and this in itself would add to the confidence of consumers and prospective home buyers, said Mr Harvey.

Second, as residential building levels have dropped off, builders have had to become increasingly competitive which means there are some very good buying opportunities for those in the hunt for a new home.

For More on the AUD Fundamental Picture, Read This Story: Next 2 Weeks of Macro Data to Decide If AUD/USD Extends Rally

For a Look at Australian Economic Data, Click Here: Australia Country Profile

Nick Nasad
Chief Market Analyst