According to the latest Building Approvals data from the Australian Bureau of Statistics (ABS), when seasonally adjusted, overall dwelling approvals fell by 3.2 per cent between April and May, bringing the total number of dwellings approved to 17,791.
The ABS noted that the decline was driven by an 8.6 per cent fall in house approvals, which dropped to 9,545.
However, the overall decline was partly offset by a 4.7 per cent rise in approvals for non-detached dwellings (i.e. units and other housing).
Looking at the figures year-on-year, total dwellings approved rose by 3.1 per cent (seasonally adjusted).
Senior economist at AMP Capital Diana Mousina said that she wasn’t surprised by the figures.
“The current slowing in residential construction across Australia has been anticipated for some time,” Ms Mousina said.
“Interest rate cuts over recent years spurred demand for housing, leading to a building boom.
“Building approvals are down from their 2015 highs but are hardly collapsing, and approvals activity is still well above levels compared to pre-2015.”
Ms Mousina noted that she expects construction approvals to continue declining, but she said that the fall would be “gradual”, offset by a pipeline of activity yet to be completed, particularly in NSW and Victoria.
Further, the ABS data revealed that the total value of dwelling also fell, dropping by 0.1 of a percentage point, driven by a 0.3 of a percentage point fall in residential housing, offset by a 0.4 of a percentage point rise in the value of non-residential buildings.
Ms Mousina noted that she expects home values to continue falling as a result of an oversupply from the housing boom in some markets and a tightening in credit conditions.
CoreLogic’s latest Hedonic Home Value Index revealed that property prices dropped nationwide for the ninth consecutive month, falling by 0.2 of a percentage point in June.
Ms Mousina said that she expects prices in Sydney and Melbourne to drop by 15 per cent peak-to-trough.
“Combined with tighter lending standards, poor affordability and falling price growth expectations, we expect further downside to home price growth across Australia,” Ms Mousina continued.
“Sydney and Melbourne home prices have further downside to go. We expect these cities to see a top-to-bottom fall in prices of around 15 per cent spread out to 2020, which implies another 10–13 per cent decline.
“Other capital cities are likely to perform better, given that they haven’t experienced the same gain in prices over recent years.”
The AMP economist noted that with household wealth benefitting from the price boom of the past few years, there could be broader downside risks to the economy if the price slowdown persists.
“Over the past few years, the strong gains in home prices have allowed households to draw down on savings, which has been positive for consumption.
“But looking ahead, the savings ratio (currently at 2.1 per cent) is unlikely to move significantly lower, which is a constraint for consumer spending,” Ms Mousina added.
The economist claimed that such downside risks would prevent the Reserve Bank from lifting the official cash rate in the near future.
“A weakening consumer is a large downside risk for the Australian economy. We remain of the view that the soft economic backdrop means that interest rate hikes from the Reserve Bank are still some time away and we expect the first rate hike to occur in 2020,” the economist concluded.