Despite the uptick some analysts expected, Australian building approvals appear to be experiencing the full effects of the fastest increase in interest rates in a generation, with ABS data pointing to a 4.6% drop in September (to 13,144), which undoes much of the 8.1% gain recorded a month earlier.

Overall, housing starts are running at 160,000 a year, the slowest growth since 2012. Based on these numbers, the federal government’s plans to build 1.2 million new homes in five years is little more than a pipe dream.

The number of new houses approved in September fell by 4.0% for the month, which leaves approvals of new houses in the last three months 13.9% down the same quarter last year.

In seasonally adjusted terms, HIA data points to a decrease in house approvals in September for WA, Victoria and South Australia of -12.8%, -9.3% and -3.0% respectively – while increases were witnessed in QLD (1.2%) and New South Wales (0.9%).

In original terms, declines were also seen in the Australian Capital Territory (-11.8%) and Tasmania (-2.4%), while the Northern Territory increased by 56.0%.

These low approvals figures will produce a decade low volume of new housing starts in 2024 and it will be even longer before this slowing in activity emerges in lagged indicators such as unemployment and inflation.

Further declines to come

Based on the inflation figures released last week – which showed prices for the September quarter 5.4% higher than a year earlier – it’s easy to see why the Reserve Bank may feel justified in further rate hikes.

However, Tom Devitt, HIA senior economist argues that this perspective fails to appreciate that leading indicators – like building approvals – are only now starting to reflect last year’s rate hikes.

Devitt expects further declines as the fuller impact of this year’s rate hikes flow through to households.

“These low approvals figures will produce a decade low volume of new housing starts in 2024 and it will be even longer before this slowing in activity emerges in lagged indicators such as unemployment and inflation,” said Devitt.

He reminds buyers and sellers alike of the protracted lags in this cycle due to the record high volume of building work that was in the pipeline when the RBA first raised rates in May 2022.

As a result, adds Devitt, the volume of houses under construction only started declining in the June quarter of 2023, and remains elevated, a year after the first increase in the cash rate.

“This large volume of building work has obscured the impact of these rate rises on the broader economy, especially unemployment, as the building industry employs over one million Australians.

Housing cycle

While fewer houses are being built, prices continue their upward trajectory, with CoreLogic data for October revealing a 0.9% increase, the fastest rate of growth since June.

Nine consecutive months of gains have seen prices climb 7.6% since 2023 began, and are now on track for a 9% gain this year.

CBA economist Gareth Aird attributes the disconnect between the 30% drop off in home lending since May, and sustained growth in prices to the spectacular lift in immigration.

Based on the underlying strength in immigration, neither Aird nor his peers expect property prices to reverse recent rises any time soon.

While the supply shortfall is likely to continue, Shane Oliver chief economist AMP suspects the impact of high interest rates will start to get the upper hand next year, especially if the RBA hikes again and unemployment rises by more than expected.

“Price gains are expected to slow to 5% next year, but the risk of another leg down in prices next year is high,” said Oliver.

“The outlook for the property market is more uncertain than normal as the property market is caught between the extremes of a
supply shortfall and the negative impact of higher interest rates – both of which are still playing out and are getting more extreme.”