Australia home building a boon for economy

SYDNEY: Approvals to build new homes in Australia jumped a surprisingly strong 5.9% in November, further evidence of a construction boom that will increasingly foster growth.

But Wednesday's data failed to sway market expectations which remain evenly split over whether the Reserve Bank of Australia (RBA) would raise rates again next month, with investors awaiting key job and inflation data due later this month.

Approvals for apartment blocks, a typically volatile sector that suffered during the crisis when funding dried up, led the way in November with a whopping 32% jump.

That lifted total building approvals by a third from November last year, the biggest rise in 7-1/2-years.

"Construction activity will be very buoyant in 2010, ensuring solid activity levels for firms in building material, construction and engineering sectors," said Craig James, an economist at the Commonwealth Bank.

Activity in non-residential approvals was equally impressive, with the value of work up 53% during the month thanks largely to generous government stimulus spending on schools.

The overall strong report eclipsed a 1.9% dip in approvals for new private houses, marking a pause after an 11-month rally.

Analysts at Commonwealth Bank say the construction boom could last two to three years and add 2-3 percentage points to economic growth.

This is without accounting for sizeable additional expenditure incurred by house buyers furnishing their new homes.

Indeed, the buoyant property market prompted the RBA to say last year it would be "disturbing" if low mortgage rates led only to higher home prices, which are already at record highs, and not more home building.

It has since raised rates for all three months between October and December, becoming the first of G20 central banks to tighten policy.

Interbank futures are priced for a 50-50 chance of a 25-basis-point rate rise when the RBA next meet on Feb 2.

Record prices
The RBA stunned investors last month when it said rates at 3.75% were in a "normal" range, cooling views it was on an aggressive tightening campaign.

Yet, some analysts still see the RBA tightening this year, with elevated house prices supporting spending.

Consumers are certainly jovial, judging from the data. Sales of new vehicles rose to the highest level for any December on record, with demand boosted by tax breaks.

Unemployment is expected to have peaked at 5.8%, with the job market forecast to recover this year. A survey showed on Wednesday employment picked up in the services sector even though growth in the industry halted in December.

Fundamentals back the case for higher home prices. Immigration is at a record and the population is growing at its fastest in 40 years. These come at a time when house supply is tight, with construction languishing below historical averages.

"Building levels remain lower than the long term average and are not meeting runaway population growth," said Alex Joiner, an analyst at ANZ. "This means the tightness in the housing market will continue."

Data from property specialist RP Data, regarded as the most comprehensive of house industry surveys, showed national house prices rose 1.1% to a record in November. That was the 11th consecutive month of gains. It estimated the median city house price across Australia was at a record peak of A$530,406 (US$483,900). This is in marked contrast to US and European economies where house prices are still well below pre-crisis levels.

In fact in the United States, foreclosures are still at a record high, threatening to depress anew prices that are just starting to stabilise. — Reuters

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