Lack of building raises possibility of an interest rate cut

Dwelling approvals fell by 5.5 per cent in March, after rising by 3.0 per cent in February. Approvals are up 3.9 per cent over the year.

• House approvals fell by 4.1 per cent in March (private sector up 0.4 per cent). ‘Lumpy’ apartment approvals fell by 7.7 per cent after rising by 1.4 per cent in February.
• The current number of dwelling approvals (12,599) is below the decade average (13,434).
• On balance, today’s data increases the likelihood of a further rate cut. Market pricing on a quarter of a per cent rate cut next Tuesday has jumped from 36 to 54 per cent.

What does it all mean?

• There is no need to get overly concerned with the modest fall in March building approvals, especially given that the results tend to be volatile and follows a 3 per cent lift in February.
• The housing sector is being supported by the low interest rate environment. However the growth has been off a low base and occurring at a snail’s pace. It would have been much more encouraging to see a pickup in approvals, given it is a key forward looking indicator. More approvals leads to more homes being built over the medium term, and will provide additional support to the overall economic growth.
• The key is ensuring that there is enough new stock coming onto the market place to prevent an upward surge in prices. At present it does seem like demand for housing is matching supply and there is no reason for concern.
  There has been an array of weaker economic indicators over the past couple of weeks. And the low inflation environment ensures that the Reserve Bank can consider further rate cuts.
• The void being left by the tapering in mining investment needs to be picked up by another area of the economy. The housing recovery is still in its infancy and the non-mining business sector is unlikely to step up to the plate until the Federal Election is out of the way. In addition the potential increase to the Medicare levy represents further fiscal tightening.
• There are certainly a lot of reasons the Central Bank can use to justify another rate cut. However CommSec believes it is likely that policy makers will be more prudent and wait on the release of the Federal Budget in just under a fortnight before considering a rate cut in June or July.

What do the figures show?

• Dwelling approvals fell by 5.5 per cent in March, after rise by 3.9 per cent in February. Approvals are up 3.9 per cent over the year.
• The current number of dwelling approvals (12,599) is below the decade average (13,434).
• House approvals fell by 4.1 per cent in March (private sector up 0.4 per cent). Meanwhile ‘lumpy’ apartment approvals fell by 7.7 per cent after rising by 1.4 per cent in February.
• House approvals are down 1.2 per cent over the past year while apartments are up 13 per cent.
  The value of all commercial and residential building approvals rose by 7.0 per cent in March after falling by 4.1 per cent in February. Residential approvals fell by 6.9 per cent with new building down 3.6 per cent and alterations & additions down 22.8 per cent. Commercial building rose by 29.4 per cent in March after falling by 12.9 per cent in February.

What is the importance of the economic data?

• The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops.
• Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

What are the implications for interest rates and investors?

• On balance, today’s data increases to the likelihood of a further rate cut. Market pricing on a quarter of a per cent rate cut next Tuesday has jumped from 36 to 54 per cent.
• CommSec believes that while the Reserve Bank will continue to maintain an easing bias, policymakers are unlikely to be cutting interest rates next week. Rather a further one month’s global and domestic economic data will provide a better picture of the economic landscape. The Federal Budget will also be out of the way and give a better understanding of fiscal tightening measures.