CHART: Australia's housing construction slowdown may not be as severe as many currently fear

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Housing loans to build and buy new houses in Australia are increasing sharply, and that means that residential construction slowdown in the coming years may not be as severe as some forecasters currently foresee.

That’s the view of ANZ’s economics team who note that strong growth in loans to build and purchase new dwellings typically leads movements in Australian building approvals volumes.

“The trend value for these is now some 9% higher than at the end of 2016,” the bank wrote in a note released late last week. “In the past this combination of finance has been a very reliable indicator of the level of building approvals.”

As seen in the chart below, ANZ says that “it suggests that we could see a surge in dwelling approvals over coming months”.

Source: ANZ

The chart overlays the trend growth in housing finance to build and buy new houses against changes in Australian building approvals data. The former is advanced by four months to show the lead relationship that it has to building approvals.

According to ANZ, a rebound in building approvals would be at odds with both its own and other forecasts for a significant decline in the years ahead.

“We had expected the level of dwelling approvals to drop about 20-25% from its late 2016 high, which implies a further decline from current levels,” it says.

ANZ says that it takes the signal from the housing finance data seriously, acknowledging that the downturn in building approvals and hence in dwelling investment could be shallower than it previously expected.

Many forecasters have steeper declines in building approvals factored in than those issued by ANZ, leading to concern that a slowdown in residential construction will act to curb employment and household spending growth, and with it the broader Australian economy, in the years ahead.

While that may still eventuate, it’s clear from the boom in lending to build and buy new homes that the likely slowdown could be more gradual and shallower than what many currently expect.

The Australian Bureau of Statistics (ABS) will release updated building approvals data for July on August 30.

In June, the ABS said that building approvals surged by 10.9% to 18,453 in seasonally adjusted terms, breezing past expectations for an increase of 1.0%. It was the largest percentage increase since July 2016.

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