Is Australia in a Housing Recession?

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At first glance, there appear to be similarities between Australian and New Zealand residential construction approval numbers in April as both countries suffered a fall in the vicinity of seven to eight per cent after seasonal adjustments.

That, however, is where the similarities end.

In New Zealand, seasonally adjusted residential consent numbers were at their third highest point over the past 18 months and were around one third higher than they were in 2011. April’s numbers were made to look bad only because March was an abnormally strong month.

In Australia, the total number of dwelling units approved for construction (seasonally adjusted) hit its lowest level since January 2009 and was down by almost a quarter year on year.

In New Zealand, the modest housing recovery is being supported by the Christchurch rebuild and a shortage of housing in Auckland – supports which will not disappear soon.

In Australia, aside from last month’s interest rate cuts, housing construction activity does not appear to have many supports at all. Indeed, existing supports – grants for homeowners in Queensland and Victoria – are in the process of being withdrawn.

New Zealand’s numbers are positive and encouraging. Australia’s are ugly.

Does this mean we in a building recession? According to Housing Industry Association (HIA) chief economist Harley Dale, it does indeed.

“Building approvals have continued to fall over 2012 to date and imply a recessionary level of new residential construction in 2012,” Dale says. “That’s not a positive, upbeat outcome to report, but it is a fact which can’t be ignored or denied.”

Technically, Dale is correct.

Economists generally define a ‘recession’ as two consecutive quarters of negative growth – two quarters in a row of falling activity. On a seasonally adjusted basis, figures from the Australian Bureau of Statistics (ABS) indicate that housing activity has actually fallen for the past four quarters up to and including March this year. Indeed, the latest Construction Work Done report from the ABS shows that home building activity has actually diminshed by 8.3 per cent over the past year and that total building activity is down 6.8 per cent.

Not only are we in a housing recession and, probably, a broader building recession; we are in a big one.

Residential Building Aprovals

So when do things improve?

In the immediate term, the approval data above does not bode well for activity. Neither does data for new home sales, which despite an improvement in April remain at low levels.

Still, the silver lining in all this is that forecasters generally feel that if we have not indeed already hit rock bottom, we are getting pretty close to it.

Despite Dale’s pessimistic assessment, the HIA expects the most recent quarter to be as bad as it gets for housing starts. Starting in this quarter, the HIA expects starts to pick up somewhat – albeit with activity remaining at very low levels.

The HIA is not alone. The Construction Forecasting Council expects a modest pickup to take hold from the third quarter of this year, with the dollar value of work done on residential construction to rise from $18.681 billion in the current quarter to $20.444 billion by the final quarter this year and then to rise above $23 billion by the last quarter of 2013.

Certainly, May’s interest rate cuts should help, though the end of home buyer incentives in Queensland and Victoria will not.

More generally, some believe activity will pick up slowly as new home buyers, largely absent from the market over recent years following the end of the federal boost to the homeowners grant in 2009, will eventually return to the market.

Bottom line: as we get into the second half of the year, things should at least start looking less ugly than they do now.

Housing Starts Australia

By Andrew Heaton
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