Australia's economy may be about to lose a major growth engine, as new home building slows

Mandatory Credit: Michael Cooper/Allsport

Adding to concerns expressed by the likes of ANZ and Morgan Stanley that Australia’s residential property boom may be about to slow, contributing less to economic growth than what has been seen in recent years, Australian new home sales fell heavily in September with the HIA reporting a decline of 4%.

“In the month of September 2015 detached house sales declined in four out of the five the mainland states”, wrote Diwa Hopkins, economist at the HIA.

“Detached house sales declined by 19.8% in South Australia, 8.6% in Western Australia, 5.9% in Queensland and 0.5% in New South Wales. In Victoria, detached house sales increased by 3.1%.

The increase in new home sales in Victoria, bucking the overall national trend, coincides with news that foreign buying activity in the state surged during the September quarter.

Residential construction activity has been playing a critical role in the Australian economy over recent years, helping to make up the gap in growth left behind by the end of the boom in mining investment.

While overall sales remain only 5.2% below the cyclical peak struck in April this year, something that Hopkins suggests “augers well for actual new home building activity in 2015/16,” she suggests that restrictive credit conditions are “likely to curtail the boom in new home building” beyond the current financial year.

“The deterioration in credit conditions is likely to weigh more heavily on new home building activity beyond 2015/16. We have therefore pared back our forecasts for activity over our forecast horizon beyond the end of the current financial year,” she wrote.

In recent months lending to Australian property investors has slowed sharply, a result of regulatory changes from Australia’s banking regulator APRA to cool lending to this segment. Higher capital charges for banks, tighter restrictions on new investor lending and higher interest rates have been widely cited as the catalysts behind the lending slowdown.

Diwa’s remarks towards restrictive credit conditions fit with the findings of the NAB September quarter residential property survey released earlier today in which respondents indicated that tight credit conditions were the chief constraint on new housing developments, especially in New South Wales and Victoria where investor activity had been the greatest in recent years.

NAB quarterly residential housing survey – Constraints on new housing developments

While many agree with the action taken by APRA to cool investor activity in the housing market, something that was widely perceived to be creating financial stability risks given rapid house price growth in the investor hot spots of Sydney and Melbourne, it also shows just how carefully regulators must tread at this crucial time in Australia’s economic rebalancing.

With mining investment expected to contract sharply over the next two years, and household consumption likely to remain subdued given elevated unemployment and record low wages growth, residential construction remains a crucial cog in the economic rebalancing story. Should activity in this sector slow sharply as a result of recent regulatory changes, it will likely see already subdued economic growth expectations diminish even further in the years ahead.

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