Here’s the economic policy dilemma for 2017 and 2018 for the Reserve Bank, the Federal Government and investors – the prospect of sub 3% GDP growth for much of next year is a real possibility, even though the commodities rebound continues.
That’s because the housing boom, which has supported the economy while it transitions from the mining investment boom, is fading.
The big policy question for the Federal Government, RBA, investors and many companies is – will it continue injecting enough momentum into the economy in 2017 and 2018 to replace the slow rise in non-mining investment as the driver of economic growth and employment?
Later today we get the business investment data for the September quarter (which under state the true level of non-mining investment, especially in services). That will give us some understanding of what business plans to spend on investment over the next year.
Non mining investment is rising, and analysts are looking for another gain in the third estimate for investment for 2016-17 in today’s figures.
There’s weak growth in retail sales (2.8% annual in the year to September against 4% in January), stuttering labor market growth, weak (falling wages), weak nominal GDP growth and tax collections – but a solid rebound in our terms of trade. Building and construction activity fell more than expected in the September quarter, but remains the growth engine for much of NSW, Victoria and southeast Queensland where the growth in the economy is concentrated.
Falling housing approvals figures are the clearest sign to date that Australia’s high-rise driven dwelling construction boom is starting to turn down – they are the forward indicators of activity in housing and residential construction in 2017 and 2018 and its falling
But ignore that big fall in seasonally adjusted approvals which grabbed the headlines and instead focus on the smaller drop in the trend figure – for the 5th month in a row. The number of dwellings approved fell 3.3% in October, in trend terms, and has fallen for five months, according to figures yesterday from the Australian Bureau of Statistics (ABS).
In trend terms, dwelling approvals fell in October in every state and territory bar the ACT – a pretty convincing state of affairs.
The ABS said that in trend terms approvals fell 4.6% in South Australia, New South Wales saw a 3.8%, Queensland (3.6%), Victoria (3.3%), Western Australia (3.0%), Tasmania (2.6%) and Northern Territory (0.2%), They were up 4.5% in the Australian Capital Territory.
Approvals for private sector houses fell 0.6% in October, in trend terms. Private sector house approvals fell in South Australia (2.5%), Western Australia (2.3%), New South Wales (half a per cent) and Victoria (0.1%), but rose 0.4% in Queensland.
In the year to October, total approvals are down 7.2% in trend terms, 4.9% for private houses and 11% for non private swellings, such as apartments, townhouses and duplexes.
And looking at what has happened in 2016, the ABS shows that total approvals peaked in may at 20,236, and fell 10.7% to 18,064 in October. New private house approvals peaked in march at 9,988, but only dropped 5% or 533, to 9,455 in October.
And non-private dwellings (apartments etc) peaked at 10,361 in May, and have fallen 17% to 8,608 in October.
That is all a far more accurate picture than the huge falls reported in the seasonally adjusted figures.
The ABS said the seasonally adjusted figures showed Approvals fell 12.6% in October, from a revised 9.3% (-8.7%) drop in September.That was well below the average of market forecasts of 2% growth, and well below even the lowest estimate of minus 4.5%.
Year-on-year, the fall was a massive 24.9%, down from a revised 6.8% (previously -6.4%) fall in September, and market forecasts for a 6.2% drop. Approvals for private sector housing fell 3.4% month-on-month, or 5.7% year-on-year in October. The big drop was for private sector dwellings excluding houses – apartments, townhouses, duplexes etc – which dropped 24.8% from September, and was down a massive 42.6% from a year ago.
If those figures were sustained the housing sector would be in recession by the end of 2016. But they won’t be. The seasonally adjusted series is very volatile, particularly month to month – this was the largest drop since November 2015 (and there have been a couple of big monty rises in the same period).
The big falls and rises are influenced by the pace of local government approvals – they can be bunched into big groups from some councils, or kept back. They could have been impacted by the NSW local government changes and elections in September and the confused picture on mergers since then.
But the figures do show the long home building boom is fading, just as the boom in used houses (especially in Sydney and Melbourne is slowing) and investor lending (down 16% in October).
So what does this mean for the economy?
Westpac economist Matthew Hassan says.”Overall the update is unambiguously weak and puts a clear marker in the ground showing the construction cycle is now turning down.”
"A drop in approvals will take some time to translate into lower construction activity. High rise apartments, for example, can take two to two-and-a-half years to complete. So the downturn on this segment won’t hit activity until "well into 2018", Hassan said.
“Although very early days, the magnitude of today’s weakness means approval volumes are on track to decline sharply" in the final three months of the year, JP Morgan economist Tom Kennedy said yesterday. He forecast that “the impulse from residential investment to real GDP should fade in 2017".
The building approvals numbers are broadly negative for ASX-listed companies exposed to the housing construction boom, according to RBC Capital analyst Andrew Scott.
"The last two months’ of building approvals data seems to reaffirm our view of a peak in Australian housing starts in calendar 2016," Scott says.While we believe that demand may be supported for some time beyond this, a slowing detached housing starts profile will likely provide negative sentiment for the building materials stocks."
The building approvals weakness and sluggish wages growth make the joy seen in the Federal Government at getting the ABCC legislation through the Senate look premature.
The reality is that activity in building and construction is fading, wages pressures will ease, unemployment will start budging up after more part-time work appears, and the mid-year economic update on December 19 will look ‘rubbery’.
