New home sales to remain weak during 2011 as interest rate hike remains imminent

New home sales are expected to remain weak during the first few months of 2011 but the ultimate result will depend on how interest rates move, Housing Industry Association economist Harley Dale has said following the release of disappointing sales results for November 2010.

A subdued forecast for construction also means new home sales will remain low during 2011, Dale argues. The comment comes just as the ABS this morning released figures showing dwelling approvals fell by 4.2% in November.

“How sales improve in 2011 will largely depend to a large extent on what type of interest rate rhetoric we see in the next month or two,” Dale says.

“There’s a thought that there will be a period of time in early 2011 when rates are on hold – maybe that will help the chances of seeing some moderate improvement… but the evidence suggests we will see a weak result.”

Economists such as CommSec’s Craig James believe interest rates will rise another 25 basis points as early as April. And with construction figures set to remain low during the rest of the year thanks to interest rates and ongoing difficulties with planning approvals, Dale says a good result is unlikely.

“Unfortunately, due to the volume of building activity expected during this year, we know that the number of dwellings being constructed during 2011 will be lower than in 2010 and based on the November sales figures that case has been made even further.”

“The risk of a sharp contraction in new home building in 2011 is exacerbated by the negative impact on households and small businesses of increases in borrowing costs and by the persistent lack of available credit for small- and medium-sized new home projects,” Dale said yesterday.

Yesterday the HIA released figures showing sales of new homes had dropped by 0.2% in November, with detached housing also falling by 1.1%.

Over the quarter to November, new home sales fell by 2%, and were 11% lower than during the same period in 2009. Sales fell by the largest amount in Queensland, with a 10.4% fall, while sales also fell by 0.8% in South Australia.

Dale says the interest rate hike in November is the main factor behind the drop in sales.

“I think it’s a little bit coincidental that you get very well publicised and quite large rate hikes in the first week of November and then you also see relatively weak results for new home sales in the same month.”

“I’m sure that the sentiment around that rate hike and the actual fact we had a rise has a lot to do with it. We also had a series of weak updates on housing indicators through most of 2010 and it was always unlikely we’d see a massive turnaround.”

As a result, he says the December figures will also remain weak and that a similar result can be expected in the first few months of 2011, even though prices have remained relatively low during the past few months.

“All we have to go on at the moment is anecdotal evidence, but that suggests to us that we’re not going to see a particularly strong month for new home sale in December. After that, we are pretty much reliant on the sentiment around interest rates.”

Dale also says the Government needs to drastically address the issue of housing and planning development at its upcoming tax reform summit, saying that, “it would be a shot in the arm for confidence and activity in the residential sector to see the New Year kicked off by a re-engagement of housing policy reform”.