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Growth of house approvals at 2½-year highsBuilding approvals; Export & import prices
Dwelling approvals: Approvals by local councils to build new homes declined by 20.0 per cent in December after increasing by an upwardly revised 12.6 per cent in November (previously 11.7 per cent). It was the weakest monthly outcome in nearly 5½ years. In trend terms, approvals declined by 1.7 per cent – the third consecutive monthly decline.
House approvals rebound: House approvals are up by 5.5 per cent over the year to December – the strongest annual growth rate in seasonally adjusted terms in 2½ years.
Export & import prices: Import prices rose by 2.0 per cent in the December quarter and were up by 1.4 per cent on a year ago. Export prices rose by 2.8 per cent and were up by 2.4 per cent over the year. Based on today’s data we expect that the ratio of export prices to import prices (terms of trade) rose by around 0.9 per cent in the December quarter after declining by 1.4 per cent in the September quarter. 
What does it all mean?
Apartment approvals are notoriously volatile, particularly during the summer ‘low’ season. After an outsized jump in Melbourne high rise approvals in November, a ‘payback’ was expected. The decline in December more than wiped-out the gains from the previous month. And it was the weakest monthly outcome since July 2012.
That said, Victoria is still the ‘place to be’ for dwelling approvals nationally. Dwelling approvals are up by 18.2 per cent in trend terms, reflecting the underlying strength of the economy and nation leading population growth.
Overall dwelling investment may have peaked, but detached house building activity remains healthy. House approvals are up by 5.5 per cent over the year to December – the strongest annual growth rate in seasonally adjusted terms in 2½ years.
Australia’s terms of trade rose in the December quarter. Prices of our largest exports – iron ore, liquefied natural gas, coal and metals – all rose amid a global upswing in economic activity. Commodity prices have risen to around 3-year highs, boosting national income.
What do the figures show?
Building Approvals:
Dwelling approvals fell by 20.0 per cent in December after increasing by an upwardly revised 12.6 per cent in November (previously 11.7 per cent). It was the weakest monthly outcome in nearly 5½ years. In trend terms, approvals declined by 1.7 per cent – the third consecutive monthly decline.
The total value of dwelling approvals declined by 25.4 per cent to $5.8 billion in December, falling from a record high $7.8 billion in November. 
Over the past year 220,976 new homes were approved, down 5.6 per cent on a year ago.
House approvals rose by 1.4 per cent in December after falling by 2.5 per cent in November.
Apartment approvals fell by 38.8 per cent in December after increasing by 30.2 per cent in November. Apartment approvals remain volatile and this was the weakest monthly result in over five years.
Dwelling approvals across states/territories in December: NSW (-19.1 per cent); Victoria (-35.2 per cent); Queensland (+4.2 per cent); South Australia (-12.2 per cent); Western Australia (-0.5 per cent); Tasmania (-1.9 per cent). Trend terms: Northern Territory (-13.0 per cent); ACT (-35.0 per cent).
The value of all commercial and residential building approvals fell by 17.8 per cent in December. Residential approvals declined by 27.6 per cent with new building down by 5.5 per cent while alterations & additions fell by 5.5 per cent. Commercial building fell by 3.4 per cent. Export & import prices
The Bureau of Statistics (ABS) reported that import prices rose by 2.0 per cent in the December quarter after declining by 1.6 per cent in the September quarter. Import prices increased by 1.4 per cent over the year, driven by Petroleum, petroleum products and related materials (+17.0 per cent).
The ABS said: “The rise was driven by higher prices paid for Petroleum, petroleum products and related materials (+14.0 per cent), reflecting tightening worldwide supply due to global production restrictions and capacity constraints. This pricing pressure has flowed through to a rise in Organic Chemicals (+10.0 per cent) which are derived from Petroleum. Fertilisers (excluding crude) rose 23.1 per cent and Inorganic Chemicals rose 13.1 per cent. China’s environmental policies regulating coal intensive industries are putting upward pressure on prices of a number of industrial commodities. These rises were partly offset by falls in Telecommunication equipment (-1.8 per cent).”
Eight of the ten broad import categories recorded price increases in the December quarter.
Export prices rose by 2.8 per cent in the December quarter. This follows a decline of 3.0 per cent in the September quarter. Export prices are up 2.4 per cent over the year.
The ABS said: “Prices received for many of Australia’s mineral fuel commodities rose in the December quarter 2017. Coal, coke and briquettes rose 9.0 per cent driven by demand from China for higher quality coal and supply restrictions. Petroleum, petroleum products and related materials rose 19.7 per cent reflecting tightening worldwide supply due to global production restrictions and capacity constraints. Non Ferrous metals prices rose 9.8 per cent, driven by rises in Copper, Aluminium, Nickel, Zinc and Lead due to strong global demand. Cereals and cereal preparations rose 7.3 per cent, due to increased demand for wheat and barley from Asia and the Middle East. Gold, non-monetary rose 2.5 per cent, driven by the depreciation of the Australian dollar against the US dollar. Offsetting the rises were falls in Meat and meat preparations (-3.6 per cent), driven by beef, Gas, natural or manufactured (-1.8%) and Sugar, sugar preparations and honey (-15.5 per cent).”
Seven of the ten broad export categories recorded price increases in the December quarter.
The ratio of export prices to import prices (a proxy for the terms of trade) rose by 0.9 per cent in the December quarter after declining by 1.4 per cent in the September quarter.
What is the importance of the economic data?
The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
The Australian Bureau of Statistics (ABS) provides quarterly estimates of export and import prices. The figures assist is gauging inflationary pressures in the economy.
What are the implications for interest rates and investors?
Dwelling investment has peaked and the annual rate of council dwelling approvals decelerated to 221,000 in 2017 from 234,000 in 2016. Nevertheless, approvals for houses remain firm, supporting broader residential housing market building activity.
The annual growth rate of non-residential building approvals is at five year highs, boosted by a strong pipeline of building projects.
With a cooling of the housing market occurring in Sydney, in particular, we expect owner occupiers to increasingly turn their attention to renovations and alterations, given the ageing stock of homes.
Chinese economic activity is strong. In fact growth accelerated for the first time in seven years in 2017. Demand for Australia’s key commodities is robust, reflected by the recovery in key commodity prices, boosting the terms of trade.
Prices of imported medicine and technology goods like mobile phones are at record lows, a great outcome for Aussie consumers.
CommSec expects interest rate stability through to at least the end of 2018.
Originally published by Craig James, Chief Economist, CommSec