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Building approvals slump to 7-year low, with more rate to follow

By Ed Logue
04 Dec 2008 6:19 PM

SYDNEY, Dec 4 AAP - Monthly building approvals have dropped to a seven-year low and further interest rate cuts needed to boost demand in a sluggish economy, economists say.

Building approvals fell by 5.4 per cent to 10,730 units, seasonally adjusted, in October, the Australian Bureau of Statistics (ABS) said on Thursday.

Approvals fell for the fourth consecutive month to their level level since April 2001.

The market had forecast a rise of 0.7 per cent.

Commonwealth Bank senior economist Michael Workman said the financial crisis helped contribute to the "very weak" building approvals as Australians were concerned about their investment.

"The problem was the volatility and uncertainty through October, judging by consumer sentiment," Mr Workman said.

"With share markets falling ... and bad news out globally, people are reluctant to commit to things like building approvals."

In the year to October, building approvals were 26 per cent lower than the previous correpsonding 12 months.

Private sector housing approvals declined by 2.7 per cent while approvals for private sector "other dwellings" such as flats, fell 11.4 per cent.

Approvals for non-residential buildings, including factories and offices, plummeted 34.4 per cent in October.

The Reserve Bank of Australia (RBA) cut the overnight cash rate by one percentage point in October and has slashed the rate by another 175 basis points since, to 4.25 per cent, to lift a flagging economy.

ANZ economist Alex Joiner said building approvals had a strong historical relationship with interest rate cuts.

"We expect that the 300 basis points worth of cuts (since September) should see falls in building activity bottom out in coming months," Dr Joiner said.

"The first home owners grant, that encourages the purchase of newly constructed homes, should help this cause."

Mr Workman said recent rate cuts would probably lift building activity in November and December.

Housing Industry Association (HIA) chief executive of policy Chris Lamont said lower interest rates and the tripling of the first home owners grant would boost employment and activity in the sector.

"These measures are essential and appropriate in the current economic climate," Mr Lamont said.

Master Builders Association chief economist Peter Jones said the October building approvals reinforced the need for lower interest rates.

"The housing side now poses a major risk to the economy and points to the need for more rate cuts to ensure a recovery in housing helps prevent the Australian economy from falling into recession," Mr Jones said.