Interest rate rise tipped to speed housing slowdown

Rising interest rates mean the slowdown in residential building activity since the start of the year will increase in coming months, say economists after building consents fell sharply in June, reversing the surge in May.

However quantity surveying firm Rider Hunt says ongoing solid consent issuance in the non-residential sector is likely to underpin hefty building cost increases over the next four years.

Consents for 1883 new houses and apartments were issued last month, down from 2129 during June last year, Statistics New Zealand data shows. The number was 13.6 per cent lower than May when residential consents rose 13.2 per cent.

The volatile apartment sector affected the overall number. Consents for apartments issued in June were down 56 per cent on May and accounted for just 4 per cent of total residential consents.

The average ratio over the past year has been 14 per cent.

Excluding apartments, consents were down 6.8 per cent over the month and 4.8 per cent lower than June last year.

Looking through the volatility, National Bank economists said residential building consent issuance appeared to have consolidated at about 2000 a month over the last year but the trend in new issuance was one of decline.

They pointed out that residential consents tend to lag activity in the housing market, which had slowed in recent months and was likely to continue doing so as interest rates rose.

"We expect that residential investment will remain a drag on growth through 2006 as the lag between consents and growth pan out."

Macquarie Bank's Tim Bowring said it was "pessimistic on the outlook for residential building approvals (and residential construction) as higher interest rates finally filtered through to the broader market".

Deutsche Bank chief economist Darren Gibbs expected to see, "further, albeit modest softening over the remainder of this year".

However, the value of non-residential building consents issued during June was $411 million, 1.3 per cent up on June last year.

"In broad terms consents in this sector have stabilised after a period of exceptionally strong growth in 2004 and 2005," said Gibbs.

Research by the New Zealand Institute of Economic Research for Rider Hunt found the high level of ongoing non-residential building consent issuance and resulting activity would continue to place pressure on non-residential building costs.

"Non-residential building cost escalation is expected to remain high for most of 2006, but to ease slightly in 2007 before rising again from mid-2008."

New Zealand Economic Research forecast costs would rise at an average of 5 per cent per annum until 2010.

Costs had on average risen by 6 per cent a year over the last three years but only by 0.8 per cent per annum in the seven years to 2003.


Consents issued

* $556 million worth of residential consents were issued in June, up 7.3 per cent on the same month last year.

* $411 million worth of non residential consents were issued during the month, up 1.3 per cent.