The outlook for new home construction in Australia just took a turn for the worse

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  • New building approvals fell by 3.2% in May in seasonally adjusted terms, following another fall in April.
  • While the data is often influenced by volatility in new apartment approvals, this time falls were driven by a decline in approvals for detached houses.
  • There was a particularly sharp fall in Queensland, which led Commonwealth Bank economist Belinda Allen to raise questions about the validity of the data.

New building approvals in Australia fell by 3.2% for the month May in seasonally adjusted terms, missing forecasts of a flat print.

And data from the ABS shows the decline was driven by a sharp fall in approvals for new houses, which slumped by 8.6% for the month to 9,545. That left annual growth for detached dwelling approvals in negative territory at -1.2%.

Conversely, after a sharp fall in April, private sector dwelling approvals excluding houses — mainly apartments – posted a 4.3% gain in May to 8,104, leaving annual growth at 9.1% in seasonally adjusted terms.

The fall in seasonally-adjusted approvals for new detached dwellings coincided with another drop in new home sales last week.

Data from HIA showed that new homes sales declined in May for the fifth straight month, led by sharper falls in Victoria and New South Wales.

Looking at the data by state, South Australia recorded a strong gain in building approvals while there was a sharp fall in Queensland which Commonwealth Bank economist Belinda Allen found unusual.

“Approvals in Queensland fell 26.7% in the month, led by a 20.7% fall in private sector house approvals and a 35.8% fall in the volatile other residential approvals,” Allen said.

“This looks out of character for private sector houses to fall as dramatically in a one-month period and raises questions over the validity of the data.”

Excluding Queensland, Allen said building approvals rose by 2.6% in May and 11% in annual terms, which is likely more in line with the underlying trend.

Building approvals data has grown increasingly volatile in recent months, largely driven by the apartment sector which fluctuates depending on if a large development is given approval in a given month.

In view of that, trend data can be useful in providing context around new building approvals.

Trend data for May showed that approvals for new houses fell by a smaller 0.5% to 10,065, leaving annual growth at 4.3%.

In trend terms, approvals for new apartments also fell by 2.6% in May to 7,878 — down 3.4% in annual terms which reflected a drop from the previous month’s 2% gain.

Despite monthly volatility in private sector dwelling approvals excluding houses, approvals for new houses — in both trend and seasonally adjusted terms — have held broadly steady around the 10,000 mark for most of the last 12 months.

So today’s sharp fall in seasonally adjusted housing approvals may be an indicator that new approvals activity is beginning to slow as property prices Sydney and Melbourne continue to fall.

Allen said there may be declines in residential construction during the 2018/19 financial year, but overall levels are still likely to remain above average.

“The difference this time is that population growth is firm, particularly in Victoria and interest rates remain at record lows and are expected to remain at record lows for the foreseeable future,” Allen said.

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