Approvals For Home Building Pick Up A Tick

Sydney Morning Herald

Saturday March 8, 2008

Carolyn Cummins with Bloomberg

NEWS that the country's home-building approvals rebounded in January, driven by rising employment, wages and immigration, will be warmly greeted by listed property trusts and developers, who have major projects in the pipeline.

The latest figures show that the number of approvals to build or renovate houses and apartments climbed 1.9 per cent from December, when they slumped a revised 11.3 per cent, the Bureau of Statistics said in Sydney. The median estimate of 24 economists surveyed by Bloomberg News was for a 6 per cent gain.

An increase in home building underlines the Reserve Bank's view that Australia's $1 trillion economy has so far weathered rising borrowing costs and slowing global growth. Investors may also be switching into property after the nation's benchmark stock index plunged 15 per cent this year.

"We've got strong population growth and that's boosting demand," Martin Arnold, an economist at Commonwealth Bank of Australia in Sydney, said. "Around 175,000 dwellings a year are needed and that number is only growing at around 150,000." Building approvals rose 5.1 per cent from a year earlier.

But economists warned that the building industry could slow in coming months after the Reserve Bank of Australia increased the benchmark rate this week by a quarter point to 7.25 per cent, the highest in 12 years, to curb the fastest inflation since 1991. That follows similar adjustments in February, November and August.

CommSec's economist Craig James said the figures show that the divide between residential construction and commercial construction is vast. Business conditions are very favourable and the investment spree continues for the corporate sector. Builders and tradesman will continue to rely on the commercial construction to ensure a steady stream of work.

"The outlook for residential property is subdued, with approvals for new homes recording the biggest fall in trend terms in over a year. Housing demand continues to outpace activity in the housing sector and will remain that way for some months to come. Vacancy rates are low, rental yields continue to increase but concerns about further interest rate hikes are keeping investors out of the property market," Mr James said.

"[But] companies focused on commercial building will continue to do well over 2008."

Governor of the Reserve Bank, Glenn Stevens, said during the week that "overall tightening in financial conditions since 2007 is substantial." There is also "tentative evidence that some moderation in household demand is beginning to occur," Mr Stevens said.

The bank has raised the benchmark rate by 1 percentage point since August.

Housing affordability deteriorated in the fourth quarter to the worst on record, the Real Estate Institute reported last week. The proportion of a family's income spent on an average home loan rose to 37.4 per cent from 36.6 per cent in the September quarter, the highest since the institute began measuring affordability 22 years ago.

The "headwinds of higher interest rates are contributing to a lack of affordability," and may damp building approvals in coming months, Commonwealth Bank's Arnold said.

Economic growth slowed in the three months through December to 0.6 per cent from the previous quarter, the weakest pace in more than a year, partly because of a decline in construction, a recent report showed.

Growth in retail sales stalled in January after expanding for seven months, business confidence slumped to the lowest level since the terrorist attacks in the United States in September 2001, and consumer sentiment dropped in February to a 15-month low.

Approvals to build private houses rose 2.7 per cent to 9034 in January. Approvals for apartments and renovations declined 2.6 per cent to 3671.