Home Building Slows as Interest Rates Rise

March 11, 2024
March 11, 2024 Luke

Home Building Slows as Interest Rates Rise

The number of new homes approved for construction fell again in January, continuing a downward trend as rising interest rates cool the housing market.

Approvals for detached houses dropped 9% from December, according to new data from the Australian Bureau of Statistics. Over the last three months, detached home approvals were down 53% compared to a year earlier.

Multi-unit approvals ticked up in January but remain far below previous levels. For the three months to January, multi-unit approvals were down 54% versus the same period a year ago.

“The low volume of building approvals throughout 2023 will see the volume of homes commencing construction continue to slow this year,” said Tim Reardon, chief economist at the Housing Industry Association. “The rise in the cash rate is the primary cause of this slowdown in approvals.”

The RBA began raising its benchmark interest rate in mid-2022 to combat inflation. Since then, variable mortgage rates have climbed from around 2% to over 4%, putting a dent in housing affordability. This has led to a pullback by both buyers and builders.

All states and territories have seen approvals decline over the past year. However, the fall has been steepest in Tasmania, the Northern Territory, and New South Wales. Western Australia is the only state where approvals have increased, buoyed by its strong economy and population growth.

The cooling in approvals points to further weakness ahead for Australia’s residential construction sector. With fewer new homes getting approved, commencements and completions are set to slow as well. This will put a drag on economic growth.

Some analysts say approvals may stabilize once interest rates stop rising. But with inflation still high, the RBA is likely to keep tightening policy this year. This suggests the downturn in home building has further to run.

For an industry that was running red-hot just a year ago, it’s a stark reversal. Builders and related sectors like real estate and construction materials face a challenging period. While bad news for those industries, the slowing housing market may give some relief to buyers who felt shut out during the boom.

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