According to ANZ senior economist David Plank’s analysis of the latest dwelling approvals data from the Australian Bureau of Statistics (ABS), continued tightening of credit conditions was the main driver of the 9.4 per cent drop in August.
“While this weakness is not overly surprising, the fall in building approvals was even worse than our much-lower-than-consensus pick,” Mr Plank said.
Mr Plank added that while the size of the downturn has not been “unusual”, the driver of the decline has changed.
“What has been quite different about the cycle in dwelling approvals since 2015 is that they haven’t been driven by interest rates,” the senior economist said. “Prior to this, the swings in approvals reflect the cycle in interest rates.
“We think the recent cycles in approvals have primarily been about the availability of credit.”
The ANZ economist added that he expects housing approvals to continue dropping if tighter credit conditions persist amid public scrutiny from the financial services royal commission.
“If we assume no easing of the credit tightening until at least after the royal commission delivers its final report in February 2019, then it seems reasonable to expect that dwelling approvals could be off as much as 15–20 per cent YoY in trend terms by early next year,” Mr Plank said.
“We think the reduced availability of mortgage finance, particularly for investors, is impacting pre-sales and hence the ability of developers to secure finance.”
However, Mr Plank claimed that when compared to previous downturns driven by interest rate changes, a 15–20 per cent drop-off in dwelling approvals is “not an overly huge downturn”.
“[We] think downturns driven by interest rates are likely to be deeper than those caused by a regulatory tightening of credit because higher interest rates impact the wider economy more generally.
“Time will tell whether it’s the correct way of thinking about the current cycle. Still, it’s a downturn that will cause a reasonably material pullback in residential construction.”