Housing Affordability Dealt Another Blow as Building Approvals Decline

Following last week’s news that property prices are once again surging across Sydney and Melbourne, there was little respite for would-be homeowners this morning.

According to new data from the Australian Bureau of Statistics, total building approvals fell 5.2% during May in seasonally adjusted terms.

For aspiring homeowners, it’s hard to imagine a worse outcome.

On the one hand, you’re seeing prices surge in percentage terms last seen in mid 2015. In the three months to June, property prices in Sydney climbed a whopping 6.8%. In Melbourne, the growth was less impressive, but robust nonetheless, at 3.5%.

At the same time, building approvals are falling, which should help boost prices further in the coming months.

What can we attribute this renewed interest in the property market to? The money masters over at the Reserve Bank of Australia, of course. All it took was a solitary interest rate cut to add another $35,000 in value to a $500,000 home in Sydney.

The 0.25% May rate cut appears to have been the major catalyst for this new wave of activity. Nothing else would explain it, what with the dearth of positive news in the economy.

In any case, the stagnation of house prices in late 2015 seems to have given way to a free for all once again. Forget investor lending clampdowns. Forget sluggish wage growth and sky-high household debt. The message that the market is giving us is that none of that matters when borrowing costs edge a mere 0.25% lower.

For that, we have the RBA to blame.

In days gone by, the RBA seemed genuinely concerned about the effect its rate policy would have on housing affordability. Not anymore, it seems.

Hard as it may try to convince you otherwise, the RBA isn’t overly concerned by growth in the property sector. It knows full well that the property market has become the one, and perhaps only, pillar of economic growth in Australia.

These days, cutting rates isn’t so much a matter of boosting export competiveness. It’s a means of boosting spending in the one area of the economy that supports this entire house of cards. Unfortunately, a housing market that acts as the foundation of the economy becomes a monster that serves only those already invested in it.

Of course, one way to alleviate the pressures of rising prices is to expand supply. In other words: Build, build, build, and then build some more.

While approvals have been solid in recent months, we’re now seeing a slowdown. However, this decline is largely driven by slowing approvals for non-house dwellings.

In seasonally adjusted terms, private sector house approvals rose 0.1%, having fallen 1.8% in April. But it was declines in apartment and unit approvals, down 11.3%, which dragged figures into negative.

But the news is likely to get worse over the next few months. Housing affordability is almost guaranteed to worsen between now and September. Why? Market analysts are pricing in a 60% chance of another 0.25% rate cut in August — paving the way for even more frenzied activity in the market.

Where does that leave you?

If you’re renting, but have aspirations to own, good luck is all we say. If you’re an existing homeowner or investor anywhere outside of Perth, it’ll be music to your ears. You can expect to see the recent price gains, particularly in Sydney and Melbourne, continue to surge in the coming months.

Mat Spasic,

Contributor, Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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