Building approvals out today tell us that despite the sharp fall in home prices in the eight major capitals in the March quarter, there’s still demand for new home loans.

The figures confirm that the first home owners grant for new homes is definitely having an impact, and is pushing up activity, despite doubts from the Federal Opposition and some critics who can’t see the benefit to a slumping economy from growing activity in one part of the economy that generates jobs and demand.

Reserve Bank figures last week showed that housing credit grew 0.6% in March, unchanged from the previous two months: a small positive, given the sharp falls in business lending and other personal credit. This was partially confirmed by the latest building approvals from the Australian Bureau of Statistics which saw two months and four months of rises for private home loan approvals.

The ABS said the seasonally adjusted estimate for total dwelling units approved rose 3.5% and has now risen for two months (but is still 16.5% down over the year to March). The seasonally adjusted estimate for private sector houses rose 2.8% and has risen for four months, while the seasonally adjusted estimate for other private sector dwellings rose 2.8%:

The seasonally adjusted estimate for the value of total building approved fell 3.5% in March after a revised increase of 14.0% in February. The seasonally adjusted estimate for the value of new residential building approved rose 1.1%, while the value of alterations and additions rose 2.2%. The seasonally adjusted estimate for the value of non-residential building fell 9.8%.

The 2.8% rise in private dwellings was considerably better than the initially reported 0.1% rise for February, showing some acceleration. Other dwellings approvals slowed from February’s house 34% rise.

NSW saw a 4.1% rise, second after South Australia’s 5.2% rise. WA was down 1.9%. Other Reserve Bank figures show that while short term bank bill interest rates remain low, just over the cash rate of 3%, yield on five and 10 year bond have risen sharply in the past week, despite less tension in the markets and more liquidity and lending (the BlueScope Steel $1.25 billion two trance deal today being the latest example).

The yield on the 10 year bond hit 4.70% yesterday, the highest it has been since November of last year. The yield on the 5 year bond of 4.12% is only the highest in a month. All these developments, plus soundings taken from the retail sector (which sort of seems to be still staggering along) would have been considered by the RBA board this morning.

While housing would have been high on the discussion list after the sharp fall in prices, it would not have been enough to drive a rate cut on its own. The building approval figures would have shown the board that there’s enough demand at current rates and conditions, and that demand is pent up and will go on past the June 30 cut off date for the first home buyers grant.

The fall in housing prices was bigger than anyone had forecast, but not that unexpected at the central bank where researchers have been tracking the fall in house prices by postcode now for a year or more and finding that it’s the over-inflated expensive houses (Macquarie and Babcock and Brown wannabe millionaires), plus the ending of the strong price rises in Perth and Brisbane because of the mining boom.

There will be a clue to the RBA’s thinking in the post-meeting statement this afternoon, but Friday’s second Monetary Policy Statement of the year will contain the latest forecasts and a full explanation of the bank’s current thinking.

That’s when we will have a better idea about the future direction of rates. Many analysts, including the NAB’s chief economist, Alan Oster, see rates bottoming later in the year at 2%. He said today there was a case for a rate cut now. If we happen to get a rate cut today, it will be a sign the RBA thinks there’s a deepening in the slump ahead, despite the four months of rising approvals for new private homes and the stimulus spending that seems to have supported parts of retailing.  But economists at Goldman Sachs JBWere said this morning:

In our view, with: i) conditions in financial markets improving; ii) an enormous amount of stimulus already in train; and iii) an imminent Federal Budget, the RBA will leave rates on hold at 3.00% over coming months, delaying further cuts to 2H 2009 when fiscal fade and the terms of trade will begin weighing more meaningfully on demand/income growth.

Last Friday’s Performance of Manufacturing Index was poor and this morning’s performances of services index (PSI) was a bit better, but not by much.

It was negative for the 13th month in a row, although it rose by 4.3 index points in April to 39.8 points.

That was the second straight month where a rise was reported, but the index remains well below the key 50 point level which separates expansion from contraction.

That though is a bit better than some of the results in last week’s National Australia Bank quarterly business survey.

Peter Fray

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