The downturn in new home construction in Australia appears to be gathering pace as new data shows a further slump in building approvals.

Released by the Australian Bureau of Statistics, the latest data shows that the number of dwellings which were approved for construction fell by 9.0 percent on a seasonally adjusted basis in November to come in at 13,898 – the seventh lowest monthly reading since April 2013.

Whilst the decline was driven by a 22.7 percent slump in the statistically volatile multi-residential sector (units, townhouses and apartments), approvals also fell by 2.5 percent in the more statistically stable detached house sector.

The latest data confirms a downward trend in demand for new home construction which has taken hold since the Reserve Bank of Australia began an aggressive cycle of monetary policy tightening which has seen eight consecutive monthly increases in official interest rates since May last year.

Overall, seasonally adjusted approvals contracted during five of the six months to November.

This includes a drop of 22 percent over the three months to November as the impact of rate increases began to flow through.

Whilst most of the decline has been concentrated in multi-unit construction – which is both statistically volatile and highly sensitive to interest rate movements – approvals in detached housing have fallen by 12 percent over the past three months.

The data also adds to concerns that rising interest rates will lead to a downturn in new home building that is more severe compared with that which was previously anticipated.

As shown in the chart, November’s approval data implies a level of construction activity which is low by standards of the past decade.

Master Builders Australia CEO Denita Wawn said the latest data highlights ongoing economic pressures which are being faced by the sector.

“The latest building approvals data is concerning, and it’s clear that we are facing significant challenges which need to be addressed head-on if we want to weather the storm and see a sustainable recovery, Wawn said.

“There have been signs that detached house building approvals had stabilised but recent months indicate that they are moving downwards.

“Higher density home building approvals, which are particularly sensitive to interest rate movements, had shown momentum during 2021 but this is now on the way down.

Wawn says industry challenges need to be addressed.

“A number of factors are making it difficult for new home building, including rising interest rates coupled with labour and material shortages,” she said.

“We must not be complacent in addressing some of the systemic challenges on the supply-side which continue to ripple through the economy.

“Builders continue to advocate for an increase to the migration cap and changes to the migration system that make Australia a more attractive place to live and work, and complementing this with improvements to domestic vocational education and training,”

Housing Industry Association Economist Tom Devitt said the latest data represents the next step in ‘a very well broadcast downturn’ in the market for new home construction which had been caused by rising interest rates.

Devitt says builders have worked through much of the pipeline of work which existed at the beginning of the rate tightening cycle and that a slowdown in the number of new homes which are under construction would be felt in 2023.

He cautioned that the full impact of the 2022 rate increases would not be observed until the second half of 2023.

Devitt called on the RBA to hold fire on future rate increases.

“The depth of this downturn will be determined by the RBA’s cash rate decisions,” Devitt said.

“The RBA has already undertaken the steepest hiking cycle in a generation and it needs to hold fire on further hikes to give their actions to date time to play out.

“As more housing market indicators reflect the impact of cash rate increases to date, the RBA will be under increasing pressure to reverse course in the second half of this year.”

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