Risks remain despite rebound in June building approvals

Creation Date: Tue, 11 Aug 2009 GMT

Risks remain despite rebound in June building approvals

BUILDING approvals rebounded in June, but economists said concerns about housing supply constraints and the potential for overheated prices in the future are set to persist.

The total number of houses and apartments approved for construction rose a seasonally adjusted 9.3 per cent in June from May, the Australian Bureau of Statistics said today.

It was the largest monthly rise since November 2008.

Economists had expected on average that total residential building approvals rose 8.0 per cent from the month before. The rise mostly recovered an 11.0 per cent fall in May.

Residential approvals rose a further 2.5 per cent in June from May, extending an unbroken uptick that began in January.

Economists said that the rebound was a sign that economic stimulus measures were working, but growth in approvals still lagged the pace required to ease emergent concerns about a return to housing bubble woes.

The lift in approvals comes as private-sector house price monitors report a nascent market recovery, with modest increases recorded across the market in the second quarter.

Reserve Bank of Australia governor Glenn Stevens warned earlier this week that supply constraints, at a time of growing demand, had the potential to inflate housing prices.

With the central bank's cash rate target at a 49-year low of 3.0 per cent, some economists said the RBA could raise rates earlier and faster if the economic recovery was complicated by overheating in the housing sector.

Alex Joiner, economist at ANZ, said the RBA was more likely to use jawboning first to stifle any house price surge. Any premature interest rate hike might just add to housing supply problems, he said.

Housing demand has been fuelled by low interest rates, surging population growth and generous government grants for new home buyers.

Underlying housing demand in Australia is running at 190,000 units per year, with supply running well behind at 130,000, according to the Housing Industry Association.

The imbalance could quickly generate price pressures, especially if a weak economic environment forces the RBA to keep interest rates low.

The RBA slashed its cash rate target by 425 basis points to offset the onset of the global financial crisis in late 2008 and has left the target unchanged at 3.00 per cent since April. Recent RBA rhetoric about the economy has been a lot more upbeat.

Mr Stevens said this week it was possible to see upside risks. Financial markets have priced in a strong likelihood of rate hikes by December.

"The Reserve Bank of Australia would probably prefer to see even stronger home building approvals, particularly for lower-priced housing," said Stephen Roberts, chief economist at Nomura.

"It's not that we can't have any house price inflation but if it starts to pick up too quickly that may become an issue for the Reserve Bank."