Rate cuts unable to boost approvals?

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The growth in dwelling approvals does not appear to be responding as strongly as expected to the low interest-rate environment, said a Westpac economist.

Dwelling approvals fell by 0.2% over the three months to December, a turnaround from the 10.9% jump recorded in the previous month. On an annual basis, approvals increased by 2.7%.

The strong November figures were driven by a 50% rise in approvals in New South Wales, which recorded a 50% rise in approvals. Excluding the state, approvals over the month actually went down by 0.9%.

"We attributed much of this to a delayed effect associated with regulatory changes rolled out in October with December expected to see the spike reverse," said Matthew Hassan, an economist at Westpac, in a think piece in Property Observer.

This is exactly what happened in New South Wales: It recorded a sharp decline in approvals in December, down by 30% on a monthly basis. This, however, was eclipsed by the steeper drop in Victoria at 34%.

Also read: Building Approval Rebound Likely To Be "Short-Lived"?

The weakness in approvals was also apparent in other states: South Australia and Queensland reported respective declines of 20% and 5% during the month.

"Our initial take is that this is, again, largely a temporary effect relating to the lumpy high-rise project pipeline. That said, Victoria is showing a decent lift in non-high-rise approvals as well that may be an early sign that the wider market upturn is starting to flow through to non-high-rise segments," Hassan said.

In terms of housing type, non-high-rise approvals were up 4.1% monthly but still down by 0.8% on yearly terms. Meanwhile, approval went up by 19% in the low- to mid-rise segments. High-rise approvals, on the other hand, fell by 11% after a 40% surge in November. Private house approvals also declined by 0.1%, bringing the annual drop to 7.1%.

Approvals for renovation also lagged, falling by 1.8%. On a quarterly basis, approvals in this segment fell by 5.5%, the fastest pace of decline since 2016.

Also read: Approval Decline Becomes “Alarming”?

Hassan said these figures should be taken with extra caution given the volatility in the December to January period.

"On balance, we continue to expect approvals to show a muted and slow response to rate cuts," he said.

While Hassan expects the high-rise segment to remain on an approval lull, he thinks there would be gradual growth in the non-high-rise segment by mid-2020, slightly boosted by bushfire-related rebuilding.

"While the monthly profile for total approvals may be shaping into a sharper turning point, the detail suggests the underlying cycle is turning more slowly. Either way, it's likely to be a few more months before we get a clear read," Hassan said.

Despite this, the slight improvement witnessed in the final months of 2019 could suggest that the building industry will not be a drag to Australia's economic growth, said Angela Lillicrap, an economist at the Housing Industry Association.

"The start of 2019 was tough for the residential building industry with the credit squeeze, falling house prices, and uncertainty surrounding the federal election putting a dampener on confidence," she said in a separate analysis.

Lillicrap said the continued growth in house prices will help attract more investors and increase activity in the market.

Maree Kilroy, an economist at BIS Oxford Economics, said the positive momentum in the established property market could set the scene for a recovery in approvals this year.

"All states and territories are expected to see growth over the next 12 months, driven mostly by the house and medium-density segments of the market," Kilroy said.

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