Interest rate cuts drive surge in building approvals

The latest data from the Australian Bureau of Statistics (ABS) reveals a notable uptick in building approvals for May 2025, driven largely by recent interest rate cuts. This development has been welcomed by industry experts as a positive sign for the housing market, particularly in the detached housing sector.

Tom Devitt, Senior Economist at the Housing Industry Association (HIA), highlighted the impact of these rate cuts on the housing market. “Two cuts to the cash rate have seen the volume of detached house building approvals rise to be 3.2 per cent higher than the same month last year,” he stated. This increase is a promising indicator that new home buyers are finding their way back to the market.

The ABS data shows that new house approvals were 1.1 per cent higher in the three months to May compared to the previous quarter. Mr Devitt elaborated, “Building approvals have followed other leading indicators to show that new home buyers are increasingly returning to the market.” The reduction in interest rates has played a crucial role in this trend, making it more feasible for buyers to commit to new home builds.

With further rate cuts anticipated, Mr Devitt is optimistic about the market’s trajectory. “With two interest rate cuts in the back pocket, and further cuts expected, more buyers are able to sign that contract for a new home build,” he added. The positive momentum is not confined to just a few regions; states such as Western Australia, Queensland, and South Australia are experiencing improved numbers, bolstered by strong population growth, recovering household incomes, and low unemployment rates.

However, Mr Devitt pointed out that New South Wales and Victoria are also beginning to see similar trends. “Now New South Wales and Victoria appear to be joining the party,” he remarked. Despite this optimism, challenges remain, particularly in the higher density housing sector.

While multi-unit approvals in the last three months were 25.0 per cent higher than the same quarter a year earlier, Mr Devitt cautioned against over-enthusiasm. He explained that much of this activity could be attributed to “phantom approvals.” These are projects that had previously received approval but had not yet commenced construction. Developers are seeking re-approval ahead of the National Construction Code 2022, which is expected to increase construction costs.

“But you can’t live in an approval,” Mr Devitt warned, noting that these projects, which have struggled to be viable in recent years, may not secure the necessary sales to begin construction in the near future. “Securing apartment pre-sales at current market prices have been challenging,” he added.

The economist further emphasised the need for a significant increase in multi-unit commencements to meet governmental housing targets. “Multi-unit commencements need to double from current levels in order to achieve the government’s housing targets,” he stated. However, this is unlikely if state governments continue to impose additional taxes on institutional investors.

In a move that could stimulate the apartment market, the recent New South Wales State Budget included a commitment to guarantee apartment pre-sales. Mr Devitt believes this will lead to a tangible increase in apartment commencements in Sydney. Nonetheless, he remains cautious about reaching the government’s ambitious housing goals. “Regardless of the increase in approvals, the volume of commencements will fall more than 20 per cent short of the government’s goal of building 1.2 million homes,” he concluded.

The ABS data also highlighted regional variations in home approvals. In seasonally adjusted terms, South Australia saw a significant increase of 29.4 per cent compared to the same quarter a year earlier. This was followed by Queensland with an 18.6 per cent rise, Western Australia at 14.9 per cent, New South Wales with an 8.6 per cent increase, and Victoria, which remained relatively flat with a 0.1 per cent rise. Conversely, Tasmania experienced a decline of 13.4 per cent. In original terms, the Northern Territory saw a 15.2 per cent increase, while the Australian Capital Territory recorded a modest 1.0 per cent rise.

This surge in building approvals, spurred by interest rate cuts, offers a glimmer of hope for the housing market. However, the challenges in the multi-unit sector and the need for policy adjustments remain critical factors in determining the market’s future trajectory.