Signs have emerged of a potential stabilisation in the market for new home construction as new data shows that building approvals and new home construction lending activity both stabilised in May.

But the pace at which new work is coming in remains near decade lows.

The Australian Bureau of Statistics has released two new sets of monthly data which provide an overview of demand for new home building.

In terms of building approvals, the data indicates that the seasonally adjusted number of dwellings that were approved for construction bounced back and increased by 20.6 percent during May to reach 15,032.

Caution should be read in interpreting this number as most of the increase was the result of a 59.4 percent spike in approvals for the statistically volatile multi-unit sector.

Pleasingly, however, approvals edged up by 0.9 percent in the more statistically stable detached house sector. This provides a sign that activity in this sector may have stabilised in May following two years of decline since the peak of the Commonwealth HomeBuilder boom in early 2021.

In separate data, meanwhile, the ABS reported that the number of loans that were made to owner occupiers for the purpose of either constructing a new home or purchasing a newly erected dwelling edged up by 1.9 percent in seasonally adjusted terms to come in at 4,264.

Put together, the latest data – which also follow two consecutive months of modest increases in seasonally adjusted new home sales during April and May – suggest that the pace at which new work is coming in for new residential construction may have stabilised in May.

This follows a considerable softening in the market which has taken hold since the second half of last year after the Reserve Bank of Australia began its aggressive cycle of monetary policy tightening which has seen official interest rates rise from 0.1 percent in April last year to 4.1 percent in June.

However, levels of building approvals, housing construction lending and new home sales all remain near their lowest levels in more than a decade (refer charts).

This indicates that whilst new housing demand may have stabilised in May, the pace at which new work is coming in remains extremely low by historic standards.

Moreover, the May monthly data for approvals does not reflect the two most recent rate hikes which occurred during May and June.

As a result, new home construction data may yet soften further in coming months.

Building industry lobby groups welcomed the stabilisation but caution that the outlook for new home building remains challenging.

Housing Industry Association Chief Economist Tim Reardon said that rising interest rates have seen both owner occupiers and investors retreat from the market.

Indeed, Reardon cautioned that the current data does not yet fully reflect previous rate hikes on account of an 18-month lag between the first rate increase and its impact on the ground.

In addition, Reardon says that previously approved projects have been cancelled as banks have withheld finance in the wake of interest rate rises and construction cost increases.

As a result, the number of projects that builders have sold but not yet commenced is shrinking rapidly.

Reardon says the upshot is likely to be a significant decline in new dwelling construction commencements by the end of the year.

“Cancellations also remain elevated at a rate of 25 per cent in the last quarter. This means, for every four new projects a builder is recording, a previous project is being cancelled,” Reardon said.

“The RBA’s rate increases will continue to hold down new sales and cause further cancellations as finance becomes unobtainable for an increasing number of buyers.

“The significant increase in the cost of land and construction across all jurisdictions over the past two years is compounding the impact of higher interest rates. The additional costs of compliance with the National Construction Code, that come into effect this year, will further increase the cost of new home construction and dampen demand further.

“This combination of factors will see home building continuing to contract for at least the next 12 months to its lowest level in more than a decade.”

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