Australian dwelling approvals drop sharply in May; construction likely to remain high for some time

Approval for dwellings in Australia dropped sharply in May by 5.2 percent in seasonally adjusted terms, according to Australia Bureau of Statistics. Consensus expectations for residential building approvals declined 3.5 percent. On a year-on-year basis, residential building approvals were 9 percent lower than seen a year ago, biggest decline since November 2015. The decline was driven by a 10 percent drop in unit permits with approvals of houses little changed. Approvals for houses are up 1 percent year-on-year, whereas units are down 18 percent.

Housing activity is expected to approach a broad peak, noted ANZ in a research report. In the second quarter to date, approvals rose 1.7 percent, following a 1.5 percent gain registered in the first quarter. Housing activity is believed to be close to a broad peak; however, construction is likely to remain high for a certain period of time, added ANZ.

This shows  the relatively favorable affordability, where the central bank rate cuts have aided in countering the effect of higher house prices and a huge backlog of work that is estimated at a record 13 months of supply.

Meanwhile, non-residential building approvals have risen, but they continue to be quite weak. So far in the second quarter, the approvals’ value rose 20 percent, following a 13 percent decline in the first quarter. Approvals are quite volatile and the trend is expected to have remained weak.

This implies that non-residential construction component of non-mining business investment will remain weak for some time, according to ANZ. Meanwhile, for the remainder of non-mining business investment,  there is a risk that the more crucial spending on capital goods continues to be weak for longer given the uncertainty triggered by Brexit.