Shock fall in housing data supports case for cuts

The case for another large rate cut next month is building as housing construction approvals during November last year collapsed.

According to figures released by the Australian Bureau of Statistics this week, the number of homes approved for construction in November fell by a seasonally adjusted 12.8 per cent, compared with a fall of 3.1 per cent in October.

While consumer sentiment late last year was particularly grim as the global financial crisis continued to unwind, the November data has shocked the market. Economists were expecting a fall in approvals of only 1.5 per cent. The 12.8 per cent drop means that building approvals are now at a seven year low.

Market participants believe that this week’s data is likely to cause the Reserve Bank quite a deal of concern. The slump in housing demand has occurred much faster than expected and heightens the risk that Australia may fall into recession. The construction sector represents approximately 9 per cent of the nation’s employment market, so heavy job losses in this sector will no doubt affect the overall economic growth rate.

Other economic data on retail sales out this week showed a mixed picture. The November figures were slightly better than expected with sales rising a seasonally adjusted 0.4 per cent, compared with revised 1 per cent increase in October. Economists had been expecting sales to drop by 0.4 per cent. Stronger food sales were largely responsible for the firmer results. However, deeper analysis of the data shows that growth was flat in other retailing sectors like department stores and household items.

The Reserve Bank has moved aggressively in the last few months to try and insulate the Australian economy from the worst of the global downturn. The Bank has cut the official cash rate by 300 basis points since September last year and it is now sitting at 4.25 per cent.

Market participants have been predicting that the Reserve Bank will cut rates by 50 to 75 basis points when it meets again in early February. However, the weaker than expected housing data may force the Bank to take stronger action with a 1 per cent cut.

Infochoice.com.au