Building approvals for new homes have fallen for the second time in three months, indicating a cooling down in Australia's residential housing boom.

Approvals for the construction of new homes fell 5.6 per cent in May, data from the Australian Bureau of Statistics showed on Monday.

Over the 12 months to May, building approvals were down 19.7 per cent.  The decline was far higher than market expectations of a 1.3 per cent fall in May and a 14.1 per cent decline over the previous year.

Building approvals had declined 10.3 per cent in March but bounced 4.8 per cent in April.

CBA senior economist Gareth Aird said Monday’s numbers signalled a softening in the housing market.

“The data reaffirms our view that residential construction will be a drag on economic activity from the second half of 2017, having supported GDP growth over the past few years,” he said.

Mr Aird cautioned against reading too much into the volatile monthly approval numbers but said that, based on the trend in approvals and a wider suite of data on the housing market, it was clear that conditions have cooled.

The May figures follow the tighter lending conditions imposed on banks by the regulator in late March.

The Australian Prudential Regulation Authority capped interest-only mortgage lending on March 31, telling lenders to limit higher risk interest-only loans to 30 per cent of new residential mortgages.

That set off a fresh round of rate increases by the major lenders, with banks repricing their loan book to make interest-only and investor loans more expensive.

Approvals for private sector houses rose 0.6 per cent in the month.

However, building approvals in the ‘other dwellings’ category, which includes apartment blocks and townhouses, slumped 12.1 per cent in May.

The weak result was driven by solid monthly falls in NSW, where approvals were down 16 per cent, and Queensland where total approvals declined 10.5 per cent.

JP Morgan economist Henry St John said he expects the slowdown to deepen.

“New higher-density approvals appear to be grinding to a halt in anticipation of a significant pipeline of apartment completions set to hit the retail market throughout the next 18 months,” he said in a note.

“As a consequence, we should expect real residential construction to continue to moderate into next year.”

By Prashant Mehra