Australia's Building Approvals Drop on Rising Rates

By Jacob Greber

July 30 (Bloomberg) -- Australia's home-building approvals unexpectedly fell in June for a second month, supporting the central bank's view the $1 trillion economy is slowing.

The number of permits granted to build or renovate houses and apartments dropped 0.7 percent from May, when they declined a revised 7.2 percent, the Bureau of Statistics said in Sydney today. The median estimate of 23 economists surveyed by Bloomberg News was for a 1 percent gain.

The drop in approvals suggests interest rates at a 12-year high of 7.25 percent are forcing home buyers and investors to cut spending. Reserve Bank of Australia Governor Glenn Stevens said on July 16 there is a ``good chance'' higher borrowing costs will slow the economy enough to cool inflation that has surged above his target range of 2 percent to 3 percent.

``Interest rates are biting,'' said Rob Henderson, chief markets economist at National Australia Bank Ltd. in Sydney. ``This is a clear downtrend in a market where there is already a shortage of supply of rental accommodation. It doesn't look like we need any further increases in interest rates.''

The Australian dollar traded at 95.05 U.S. cents at 12:08 p.m. in Sydney from 95 cents before the report. The two-year government bond yield fell 3 basis points to 6.33 percent. A basis point is 0.01 percentage point.

Interest Rates

Stevens and his board raised borrowing costs in March, February, November and August in a bid to cool inflation that surged to 4.5 percent in the second quarter.

Home buyers are also paying more after the nation's five biggest lenders increased mortgage rates by an average of 105 basis points since the start of this year amid rising credit costs. The central bank has boosted rates by 50 basis points in that time.

Building approvals dropped 7.8 percent in June from a year earlier.

There is ``pretty clear evidence'' that rising gasoline prices and higher borrowing costs are forcing consumers and businesses to cut spending, Governor Stevens said this month, adding ``the extent of that slowing, and its duration, are uncertain.''

Consumer confidence slumped in July to the lowest level in 16 years, businesses in June were the most pessimistic since 2001 and home-loan approvals fell in May by the most in eight years, reports this month showed.

Worsening Outlook

``It looks more likely now than it did a couple of months ago that this more moderate track for demand will continue,'' Stevens said on July 16. That will ``in due course begin to exert downward'' pressure on inflation, he said.

Approvals to build private houses were little changed at 8,699 in June. Approvals for apartments and renovations declined 1.4 percent to 3,285.

In New South Wales, Australia's largest state, approvals slumped almost 17 percent from May, ``painting a dismal picture of the outlook,'' said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney.

``The outlook for the building sector remains poor,'' she said. ``Construction and material costs are elevated, excessive red tape continues to deter new development, and higher interest rates are weighing on demand for home building.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net