Up until recently most Australian economic data has been upbeat, led by an ongoing improvement in labour market conditions.
However, of late domestic data has revealed modest cracks beginning to form in the non-mining sectors of the economy, led by weakening in the once-hot residential construction sector.
That’s the downbeat view presented by Daniel Gradwell and Dylan Eades, members of ANZ’s Australian economics team, who believe that conditions in the residential property market have deteriorated in recent months.
Here’s the basis for their call.
Building approvals declined by a sharp 12.7% m/m in November, although the majority of the weakness was concentrated in the volatile high-density segment. Even after abstracting from the monthly volatility, building approvals remain 11% below their peak in trend terms and are likely to decline further over the course of this year as home price growth, particularly in Sydney and Melbourne continues to slow. Indeed, Sydney house prices have fallen for three consecutive months and the sharp decline in auction clearance rates signal a further loss of momentum.
While building approvals remain at historically high levels, the chart below suggests that the cyclical peak for approvals is now behind Australia.
And demonstrating softening demand for housing in Sydney – Australia’s largest and most expensive property market – here’s the recent trend in the city’s auction clearance rate. Given the historic relationship that clearance rates have had to movements in house prices, it suggests that the rapid run-up in prices is likely slow in the year ahead.
Combined, the decline in building approvals, coupled with weakening demand, suggests that the boom in residential construction may now be close to or nearing its peak, suggesting that the boost it will provide to economic growth in 2016 may diminish far earlier than what many had expected.
“The weakening in building approvals suggests residential construction activity is around its peak and the impetus to economy and employment growth from this source is likely to wane going forward,” wrote Gradwell and Eades.
For an economy looking for other sectors to power Australia’s economic transition in the years ahead, this is an unwelcome development should it come to fruition.
While many expected the economic boost provided by residential construction to slow sharply in 2017, very few expected it to occur in 2016.
Should that eventuate, at a time when the domestic economy is already soft, it will likely pressure economic growth, hindering recent improvement in the labour market and keeping household consumption at historically low levels.
It may also see the RBA lower interest rates further, something the majority in financial markets currently aren’t predicting.
That’s certainly the contrarian view offered by ANZ, maintaining its call that the RBA will reduce interest rates twice in the year ahead, taking the cash rate to 1.50% by August.