Australia’s market for new home construction appears to be slowing as higher interest rates are beginning to affect demand, new data shows.

But housing industry economists warn that the full impact of the higher rates may not emerge until the middle of 2023.

Meanwhile, the data suggests that builders and tradespeople who undertake renovations of existing homes are likely to enjoy strong market conditions for some time (see below).

Released by the Australian Bureau of Statistics (ABS) last Wednesday, September monthly data for lending and building approvals indicates that the pace at which work is coming in for new home construction is slowing.

In terms of lending, the data indicates that the number of loans which were made to owner occupiers to fiancé construction of new dwellings fell by 9.9 percent on a seasonally adjusted basis to go from 4,088 in August to 3,682 in September.

This is the lowest level on record since the start of the pandemic and is generally below pre-pandemic levels (see chart).

Meanwhile, the number of loans made to owner occupiers to purchase newly constructed dwellings fell by 7.9 percent to reach its lowest level on record in more than nine years since August 2013.

Combined, the number of loans made to owner occupiers for either the purchase or construction of new homes now sites at is lowest level since April 2019.

On building approvals, meanwhile, the data indicates that the seasonally adjusted number of dwellings which were approved for construction fell by 5.8 percent in September.

Whilst most of the decline occurred in the statistically volatile multi-unit sector (and was not unexpected after a large rise in this sector in August), approvals also declined by 1.8 percent in the statistically stable detached house sector.

That said, approvals for both new detached homes and multi-units remain above pre-pandemic levels.

The latest data provides further evidence that rising interest rates are beginning to impact demand for new housing.

Last Tuesday, the Reserve Bank of Australia announced a further increase in official interest rates to by 0.25 percent to 2.85 percent – an increase of 2.75 percent since it began to increase rates last May.

In its statement, the RBA said that inflation is now expected to peak at 8.0 percent and is not expected to return to the board’s 2-3 percent target range in either 2023 or 2024.

The bank says it expects further interest rate increases going forward – the size and timing of which will be determined by incoming data.

The board said that it ‘remains resolute’ in its determination to return inflation to target and would do ‘whatever is necessary’ to achieve this.

Whilst the bank indicated its desire to also keep the economy on an even keel, it said the path to achieving this whilst returning inflation to its 2-3 percent target range over time remains ‘narrow’ and ‘clouded with uncertainty’.

From the building sector’s viewpoint, all this raises concerns that rising interest rates may eventually feed through into a contraction in new home building activity which was sharper than previously expected.

HIA Senior Economist Nick Ward said warned that the full impact of interest rate rises may not emerge until the second half of next year.

Ward encouraged the RBA to observe caution on future rate hikes until more of the impact of current rate hikes flows through.

“The RBA’s tightening is weighing heavily on demand for housing and the full impact will not emerge until the second half of 2023,” he said.

“This slowing in housing finance data is consistent with other leading indications, such as HIA’s New Home Sales Survey, which have fallen more than 15 percent in the September quarter.

“If these trends are sustained, which is expected, then the 2.75 per cent increase in the cash rate so far will have brought this boom (in new home construction) to an end.

“There is still a significant volume of work under construction that is sustaining employment across the economy. This is helping to keep the unemployment rate at exceptionally low levels. When this pool of work is completed, the full impact of this rate rising cycle on employment will emerge.

“There is a risk that this volume of work on the ground is obscuring the adverse impact of rising interest rates.

“These treacherous lags that characterise this housing cycle could result in the RBA weighing too heavily on households and businesses and jeopardising the housing industry’s future soft landing. Patience is required to see the full effect of rate increases to date.”

Outside of new home lending, the data remains encouraging for the home renovation sector.

Despite dropping back by 14.7 percent during September, the value of loans made to owner occupiers to undertake renovation of existing homes ($476.7 million) remains at more than double pre-COID levels.

This indicates that builders and tradespeople who operate in the home renovation market are likely to remain busy for the foreseeable future.

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