New home builders and building supplies companies looking at laying off staff

Buyer incentives fail to inspire home buyer confidence amid calls for deeper interest rate cuts

Unless the recently improved first home owners grant and the large drops in interest rates starts to translate into new home sales contracts soon, the home building industry is facing the prospect of laying off a large part of the workforce. This will flow through to building supply companies.

There was a shock 12.8 per cent fall in the number of plans for new dwellings approved by local councils in November.

The number of new apartment developments on the drawing boards fell 21.9 per cent in the month and is only half the level of a year ago.

The severity of the fall, which followed three months of big interest rate cuts and the tripling of the grant for first-home buyers purchasing newly built homes, has raised concern about a much sharper downturn in the housing market and sparked calls for the Reserve Bank board to cut interest rates further when it meets next month.

The slump in building approvals came as new Organisation for Economic Co-operation and Development research showed Australians had more of their wealth tied up in housing than people in other major developed nations.

Non-financial assets, principally housing, represent 75.8 per cent of Australian household wealth compared with 64.8 per cent in Britain and 43.1 per cent in the US.

Both Treasury and the Reserve Bank have been counting on the lack of housing supply in Australia to stop prices from plunging as they have in the US and Britain.

However, the dive in approvals points to a dramatic slump in demand.

The chief executive of the Housing Industry Association, Chris Lamont, said council approvals were like the forward order book for the housing industry and showed there would be a sharp fall in activity in the first months of the year.

"If you saw these results again in January and February, you would talk about a first half-year of recession with mass layoffs not only in construction, but also in the building materials industry."

Mr Lamont said the first-home buyer market had held up, but the market for people trading up to their second, third or fourth home had collapsed.

"The information that we've had from surveys of our members is that the discretionary purchase has been the hardest hit sector with detached housing.

"It is hardly surprising that people would delay upgrading a house when they have some reservations about employment security."

He said this had hit the top 100 building companies hardest, which had lost market share over the past six months to smaller companies that focus on the low-value first-home buyer market.

Fewer plans for new apartment blocks were passed by local councils in November than in any month since 1996.

Banks are tightening their lending standards on new property developments and are requiring a much higher level of pre-sales before advancing funds.

UBS chief economist Scott Haslem said the level of new dwellings being approved suggested there would be only 110,000 new dwellings built this year, down from a pace of 160,000 in the middle of last year and a level of underlying demand of about 185,000.

The fall has occurred around the country. However, in NSW the number of new dwellings being approved is at a 44-year low.

There were 1028 new houses approved in NSW in November, just 15 per cent of the national total and less than half the state's population share.

The biggest falls in November were in Western Australia and Queensland. In Western Australia, new dwellings approved plunged 29.5per cent in the month, while in Queensland they were down 15.9per cent.

ABN-Amro chief economist Kieran Davies said the sharp fall in new housing activity was likely to be accompanied by weaker housing prices.

It was too soon to expect significant benefits from interest rate cuts, and these would be set against the rising job insecurity and the wariness of banks in financing property development.

Help provided to the market by the increase in the first-home buyers grant was temporary, as it was due to return to its old level of $7000 from 1 July. "The boost it produces is just a bringing forward of demand," he said.

The Master Builders' Association chief economist Peter Jones said more rate cuts and government spending were required to restore confidence to the market.

Access Economics director Chris Richardson said housing prices were among the biggest risks facing the Australian economy over the coming 12 months.

"Given that the share market has halved and people have a choice of putting money into shares or housing, the relative rates of earnings on shares and housing have never been so different. Either share prices are about to jump right up, which is unlikely, or house prices are going to be pressured."

The OECD's research shows that the big run-up in house prices over the past decade in Australia was mainly the result of increased land valuation.

Land has risen from 48.7per cent of the value of household non-financial assets to 60.5per cent over the past 10 years, while the value of the house has fallen from 39.1 to 32.4 per cent.