Dwelling approvals hit record highs

Dwelling Approvals; International Trade; RBA Senate Testimony

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  Housing approvals rose for the second month in a row.

  Dwelling approvals: Dwelling approvals rose by 3.0 per cent in August and are up 14.5 per cent over the year. Over past 12 months a record 197,571 dwellings were approved – marking the highest result on record.

• Trade deficit narrows: Australia’s trade deficit narrowed by $288 million to a deficit of $787 million in August – largely in line with forecasts.
• Exports to China eased for the fourth straight month with receipts of $98.5 billion for the year to August. Exports to the US hit a near 5-year high of $10.42 billion in the year to August.
• Reserve Bank Assistant Governor, Malcolm Edey, and Head of Financial Stability Department, Luci Ellis, appeared before the Senate Committee. The RBA officials stressed that no specific macro-prudential controls have been ruled in or out although restrictions on loan to valuation ratios (LVRs) were considered unlikely.

What does it all mean?

• The latest economic data was clearly encouraging – particularly the lift in dwelling approvals. Dwelling approvals rose for the second straight month in August and hit record highs when viewed over the past 12 months. At the same time the trade deficit narrowed.
• Over the past 12 months there were 197,571 approvals to build new homes, marking the highest result on record. And despite the fact that approvals have consolidated over the past few months it is pretty clear that housing activity is going to be the backbone of Australia’s growth story over the coming year.
• Keep in mind that dwelling approvals (16,810) are holding over 24 per cent above decade averages, underpinned by pivotal private sector house approvals, suggesting that home building is set to lift further over the second half of 2014.
• Lower interest rates, strong population growth, improving affordability, and pent up housing demand will see the housing sector gather pace over the medium term. In addition the recent cuts to fixed interest rates by the major banks will spur a further round of home building.
• The lift in approvals will appease policymakers to some degree. Fundamentally, the growth in house prices has been driven by a lack of stock, and a substantial lift in new housing stock should ensure more sedate price growth over the longer term.
• The latest trade figures were more positive than in recent times. Australia recorded its fifth consecutive trade deficit, but the August deficit of $787 million was the smallest deficit over that period. In addition the recent slide in the Australian dollar is yet to filter to through to the trade accounts and should support a lift in exports in the next result.
• From a broader sense Australia is certainly less vulnerable to external shocks than compared with the past and the demand for Australian resources will continue to underpin the trade accounts. That is not just an ongoing lift in iron ore volumes, but also the anticipated lift in LNG exports. And to some degree the slide in commodity prices will be offset by the fall in the Australian dollar.
• Interestingly Australia’s exports to China and the US are looking more encouraging. Australia’s exports to China held just shy of $100 billion the year to August, and account for over 36 per cent of Australia’s total exports. And exports to the US hit a near 5-year high of $10.42 billion in the year to August. No doubt the lift in growth across the super economies bodes well for Australia’s external growth prospects.
• While rate hikes are off the near term agenda, it is unlikely that the Reserve Bank will shift away from its “interest rate stability” rhetoric any time soon. A few solid months of robust employment would be required to change the “on hold” message. The data suggests that the Reserve Bank will continue to keep a neutral view on rates with a slightly dovish skew.

What do the figures show?

Building Approvals:

• Dwelling approvals rose by 3.0 per cent in August after rising by 2.1 per cent July. Approvals are up 14.5 per cent over the year. Over past 12 months a record 197,571 dwellings were approved – marking the highest reading on record.
• The current number of dwelling approvals (16,810) is well above the decade average (13,555) and five-year average (14,291).
• House approvals fell by 1.4 per cent in August (private sector down 1.8 per cent). Meanwhile ‘lumpy’ apartment approvals rose by 9.2 per cent in August after rising by 3.0 per cent in July.
• House approvals are up 12.6 per cent over the past year while apartments are up 17.1 per cent.
• Across states in August: NSW approvals rose by 2.9 per cent; Victoria rose by 15.5 per cent; Queensland rose by 1.4 per cent; South Australia rose by 11.3 per cent; Western Australia fell by 16.2 per cent; Tasmania fell by 0.6 per cent.
• The value of all commercial and residential building approvals rose by 0.5 per cent in August after falling by 10.9 per cent in July. Residential approvals rose by 3.0 per cent with new building up by 3.4 per cent and alterations & additions up by 0.4 per cent. Commercial building fell by 4.5 per cent in August after falling by 27 per cent in July.

International trade:

• Australia’s trade deficit narrowed by $288 million to a deficit of $787 million in August. The July trade balance was revised from a deficit of $1,359 million to a deficit of a $1,075 million.
• In August, exports of goods and services fell by 1.5 per cent (goods down by 1.9 per cent) while imports of goods and services fell by 2.5 per cent (goods down 3.1 per cent). Exports are down 4.7 per cent on a year ago, while imports are down by 5.1 per cent.
• Rural exports fell by 4.2 per cent in August while non-rural exports fell by 0.1 per cent.
• Within imports, consumer imports fell by 0.9 per cent in August with capital goods imports up by 5.9 while intermediate goods imports fell by 8.7 per cent.
• Consumer goods imports are down 2.6 per cent on a year ago while capital goods imports are down by 8.2 per cent and intermediate goods imports are down by 3.3 per cent.
• The net services deficit narrowed marginally by $26 million to $878 million in August.
• Australia’s exports to China eased further from record highs, posting earnings of $98.5 billion in the year to August. And down from a record $100.6 billion in the year to April. Annual exports were up 19.1 per cent on a year ago and accounted for 36.13 per cent of Australia’s total exports, just down from a record high of 36.73 per cent in the year to April.
• Australia exports to the US hit a near 5-year high of $10.42 billion in the year to August. The share of exports going to the US hit a 3½-year high of 3.82 per cent.
• Australia’s imports from China eased from a record $50.3 billion in the year to July to $50.0 billion in the year to August, up 10.2 per cent on a year ago and accounting for a record 19.99 per cent of Australia’s total imports.
• Australia’s rolling annual trade surplus with China stood at $48.5 billion in August, easing further from the record high of $51.1 billion in April.

Senate Economics Committee – Inquiry into Affordable Housing

• Reserve Bank Assistant Governor, Malcolm Edey, and Head of Financial Stability Department, Luci Ellis, appeared before the Senate Committee today. Their opening statement can be found here.
• To date, the transcript of the Senate hearing is not available.
• Key points:
• One key measure of affordability – the repayment on a typical new housing loan expressed as a ratio to disposable income – “has fluctuated around a broadly stable average over the past three decades, with average repayments varying between around 20 and 30 per cent of disposable incomes.”
• “the ratio of housing prices to incomes is at the top of its historical range; but…
  over time, this has been more than offset by falls in financing costs, so that the typical repayment burden as a share of income is not particularly high. This of course does not rule out affordability problems in particular market segments or for particular types of households.”
• The composition of housing finance has become unbalanced with investor demand dominating, especially in Sydney & Melbourne.
• The RBA officials stressed that no specific macro-prudential controls have been ruled in or out although restrictions on loan to valuation ratios (LVRs) were considered unlikely.
• The RBA officials were at pains to point out that the strength of investor housing demand was largely limited to Sydney and Melbourne. The key would be to devise controls that didn’t discourage new housing supply that was required to meet strong demand and lead to more sustainable growth of home prices.
• 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.
• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
• The Reserve Bank would be heartened by the second wind in dwelling approvals. Housing activity is no doubt supporting the overall lift in spending and will continue to absorb the weakness in mining investment.
• Overall the economy is on a solid footing and remains fundamentally sound. Given the low interest rate environment, falling Australian dollar and the lift in home prices, the Reserve Bank is likely to be watching for an improvement in labour market conditions before thinking about a lift in interest rates. We expect the Reserve Bank to maintain a neutral monetary policy stance, while keeping a close eye on the transition of growth from mining investment to other parts of the economy. Rates are expected to remain on hold over the rest of 2014.

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.
• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.

What are the implications for interest rates and investors?

• The Reserve Bank would be heartened by the second wind in dwelling approvals. Housing activity is no doubt supporting the overall lift in spending and will continue to absorb the weakness in mining investment.
•  Overall the economy is on a solid footing and remains fundamentally sound. Given the low interest rate environment, falling Australian dollar and the lift in home prices, the Reserve Bank is likely to be watching for an improvement in labour market conditions before thinking about a lift in interest rates. We expect the Reserve Bank to maintain a neutral monetary policy stance, while keeping a close eye on the transition of growth from mining investment to other parts of the economy. Rates are expected to remain on hold over the rest of 2014.