Don’t expect any help from the building industry in halting the slide in economic activity in the domestic economy for the next year.
And any recovery has now been postponed to 2009-10.
The Reserve Bank board will discuss the seemingly remorseless slide in home building activity when it meets tomorrow, along with the continuing weakness in retail sales and consumer confidence, but that won’t be enough to get it to cut interest rates.
It will wait for another month at least to see what will happen: this week we get labour force figures for last month, and home price indexes for June and 2007-08 which are likely to further confirm the cooling trend in the economy.
But no change is anticipated, although the bank might send a message that the slumping level of local demand is pushing it towards a rate cut in the near future. (There is a small chance of a rate cut tomorrow, but don’t put your house on it).
Last week we discovered that June was another miserable year for the Australian home building industry, with another fall in approvals for both private sector houses and non-house building.
Building approvals fell by 0.7% in June, short of the 1% rise expected by the market compared to May. Following the very sharp fall in May, approvals are now 7.8% lower over the year – the weakest annual outcome in 2 years.
This week we will get further confirmation of the slowdown with the housing finance figures for June.
The credit aggregates for June from the RBA last week showed a further slowing in the growth of housing finance to its lowest pace in more than a decade with finance growing by 0.6% in the month (the lowest since 1996) and 9.9% over the year to June.
Nationwide, 158,938 homes were approved last financial year, a 3.6% increase on the previous year but below market estimates of underlying demand at about 180,000 a year.
The Federal Treasury has estimated that demand for new homes is expected to rise to more than 200,000 by 2009-10, leaving a shortfall of about 50,000 homes, as only 160,000 homes are built.
And in a survey released today, business forecaster, BIS Shrapnel sees no real improvement in the coming 12 months.
It expects total Australian building commencements to edge up by just one per cent in 2008/09 as high interest rates keep dwelling construction well below underlying demand.
BIS Shrapnel’s latest building activity forecast report, Building in Australia, 2008 to 2023, anticipates a 3% rise in new dwelling construction in 2008/09, offset by a 2% fall in non-dwelling building commencements.
"In 2007/08, the value of new dwelling construction remained below the last peak in 2003/04. Housing construction has been weighed down by the strength of business investment.
For the first time ever, the national value of new housing construction in 2007/08 was exceeded by the value of private sector investment in engineering construction projects. This outcome represents a pronounced changing in gears for the Australian economy.
"The strength of engineering construction activity, led by the mining sector, has boosted national economic growth and created shortages of skilled labour across many sectors. In response, companies have increasingly drawn on overseas workers to fill job vacancies.
"As a result, net overseas migration jumped to an estimated 195,000 persons in 2007/08, and is forecast to reach a new record level of 230,000 persons in 2008/09.
"This population boost is creating unprecedented demand for housing. National underlying demand for new dwellings was estimated to be 158,000 per annum over the five years to 2005/06.
"Underlying demand is forecast to average 185,000 new dwellings per annum over the 2008/09 to 2012/13 period," BIS Shrapnel said.
The group said the fact that dwelling construction remains in neutral has begun to affect the rest of the economy.
"Australia cannot cope with much more expansion in business investment because the nation is running out of housing to accommodate the additional workers required to undertake this investment.
"Housing shortages are leading to strong growth in rentals, which are now a major driver of inflation.
"According to the CPI index measure, national average rental growth was just three per cent in 2005/06, but the rate of growth accelerated to eight per cent in 2007/08. Growth in national average rentals is expected to rise to 10 per cent over the course of 2008/09.
"Strong growth in rentals, combined with steady housing interest rates, are expected to support the value of new dwelling commencements in 2008/09. A reduction in housing interest rates is expected to be a trigger for the much needed strong upturn in housing in 2009/10."
BIS Shrapnel said that while residential building has been suppressed by rising interest rates, the level of non-residential building has increased strongly, rising by 54% from 2001/02 to 2007/08.
Growth has been led by a boom in office building over the past three years.
"Demand for office space has been a corollary to the strength of mining activity, with Queensland and Western Australia enjoying booms in office building.
"However, growth in employment and retail sales are forecast to slow in 2008/09, under the weight of higher interest rates. In this environment, commercial building commencements are forecast to weaken, leading to falls in non-residential building commencements in 2008/09 (-2 per cent) and 2009/10 (-6 per cent).
"The downturn in commercial building will be an important factor in the overall building cycle in a number of cities.
"Due to shortages of skilled labour, it would be difficult for
