Australian new home sales continued to drift lower in October, creating further doubts over the outlook for residential housing construction heading into 2016.
According to the HIA, new home sales fell 3.0% in October with a 4.0% decline in detached house sales partially offset by a 1% increase in those for multi-units.
For detached housing sales, four of the five states surveyed recorded declines with the largest coming from Victoria at 9.3%. Elsewhere, sales in Western Australia, Queensland and New South Wales fell by 5.4%, 0.9% and 0.8% respectively. South Australia, at 2.6%, was the only state to register an increase during the month.
Despite the continued slide, taking new home sales back to levels last seen in September 2014, HIA chief economist Harley Dale remains optimistic towards the outlook in the year ahead.
“New home sales are not far below their historically high peak, consistent with only a moderate decline in dwelling commencements in the short term,” said Dale.
“New dwelling commencements have increased over three consecutive years to a record high. Leading indicators like new home sales and ABS building approvals suggest a fourth healthy year in 2015/16.
“That’s an impressive outlook which will remain of considerable value for the wider Australian economy, given that a peak in new housing tends to be immediately followed by a sharp decline.”
While Dale remains confident over the short term prospects for sales, he believes risks will build in the years ahead, suggesting that “slowing population growth and the unprecedented uncertainty around higher rise construction is being exacerbated by higher variable mortgage costs and a broader reach for investor credit rationing than required”.
Given high density building approvals accounted for more than 50% of total residential approvals in the 12 months to October, seen in the chart below, it’s understandable why Dale believes risks are building.
With tighter lending restrictions to housing investors, those who traditionally favour unit purchases over houses, along with deteriorating sentiment towards the outlook for house prices, it’s unclear whether demand for high density will be able to keep up with supply. That’s creating a risk that prices may soften and see many large-scale developments postponed, or entirely cancelled, as a consequence.
That sentiment was echoed by Tim Lawless, head of research at CoreLogic RP Data, who suggested earlier this week that recent variable rate mortgage increases independent of the RBA, along with tighter lending restrictions in lending to housing investors, were now starting to impact buyer demand, particularly in Sydney and Melbourne.
“Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are having an impact on market demand,” said Lawless.
“As a result of slowing housing market conditions, an additional risk for policymakers is a where a large number of dwellings approved for construction are postponed or withdrawn as developers face fewer presales or lose confidence in their ability to deliver a profitable project to market.”
While the RBA and APRA were right to take action to address financial stability concerns that were being amplified by the increased involvement of investors in the housing market, those same actions may be actually increasing risks for house prices and residential construction further down the line.
Given household consumption and residential construction – directly impacted by developments in the housing market – will be required to offset the effects of falling business investment in the years ahead, it’s little wonder that many watching recent developments in the housing are nervous.