Superficially favourable news showing an 8.4% rise in the number of house building approvals in November is smashed into perspective by the fact the this rise follows two months where approvals fell 25%. This means that the absolute level of approvals remains very low at just 11,424 units in November, some 40% or so below the level of new housing construction needed per month to keep up with longer run demand. At the moment, there are simply not enough houses being built to meet long run underlying demand from population growth and other demographic change.
If you see any commentary welcoming the building approvals data as a sign of economic strength, have in the back of your mind the fact that the level of building approvals in November was the second lowest since May 2009, and there have been only 6 months in the last decade where the number of approvals has been lower. In 1984, there were more houses being built than in recent months.
Housing construction is in recession. One only has to look at yesterday’s construction PMI survey (http://tinyurl.com/7trpa6s ) to see just how bad things are in this sector. There is clearly huge spare capacity in this sector and significant disinflation pressures are percolating through the economy from this housing construction weakness.
The weakness is not confined to housing construction - the value of non-residential building approvals fell again in November. There have now been 12 straight months where non-residential building approvals have fallen in trend terms – that’s a fall of around 17% over the past year. Much of this reflects a fall in public sector activity or in other words, the unwinding of the fiscal stimulus. Whatever the cause, it’s clear non-residential construction is also undermining the economy.
Monetary policy needs to be eased again (and again) and these data will add steel to the RBA’s commitment to cut interest rates in February. A rate cut is close to a done deal with there being more chance of a 50 basis point cut than the RBA leaving rates on hold.