Low cash rate boosts home construction

Approvals for the construction of new homes have surged above expectations as the effects of record-low interest rates filter through the economy.

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Building approvals rose 10.8 per cent across Australia in July – and 28.3 per cent over the year to July – according to figures from the Australian Bureau of Statistics, exceeding economists’ expectations of a four per cent rise in the month.

ANZ chief economist Ivan Colhoun said while the figures were encouraging, the data was subject to volatility caused by approvals of big apartment buildings.

“Month by month you do get quite a lot of volatility but there’s a gradual trend upwards,” Mr Colhoun said.

“Looking through the volatility, there is an encouraging uplift going on, particularly led by NSW.

“Housing is typically the sector that first responds to lower interest rates so it is showing its normal response to lower interest rates, although it has been a little bit more constrained than in the past.”

The healthy approvals figures came after the closely-watched RP Data-Rismark Home Value Index showed Australian capital city home prices rose more than five per cent in the 12 months to August – further signs that the housing market is recovering, CommSec economist Savanth Sebastian said.

“Low interest rates, strong population growth, healthy employment, and pent up housing demand is starting to see the housing sector shake off the shackles and begin a much needed resurgence,” Mr Sebastian said.

“Granted it is early days, but the sector looks to be on a healthy recovery path.”

JP Morgan economist Tom Kennedy said the large increase in approvals for July had followed two consecutive monthly falls and would likely be followed by a hangover in the next few months.

But despite the volatility, the figures were encouraging, he said.

“While the underlying trend is a little difficult to discern, with record low interest rates and home prices rising, it is reasonable to expect some of the uptick in investor loan activity we have been seeing to flow into further residential investment through this year and next,” he said.

Master Builders Australia chief economist Peter Jones said the approvals were a positive sign that a housing recovery was taking hold but said approvals were “nowhere near where they need to be to meet the under supply of housing”.