- AUD rises as building approvals surge eases housing concerns.

- Building approvals rise by 6.4% in June, sidelining fears of collapse.

- But housing market activity may still slow further during months ahead.

© Greg Brave, Adobe Stock

The Australian Dollar rose Tuesday after a surprise surge in the number of new building approvals issued during June showed fears over a possible collapse of the Aussie housing market to be overdone.

Australian dwelling approvals rose by 6.4% on seasonally adjusted terms during June, up from an upwardly-revised contraction of -2.5% in May, when markets had been looking for only a 1.1% rise. Some 19,133 new units were approved during the month, while the growth rate from private sector dwellings excluding houses was even faster, at 7.2%.

"AUD outperformed on an unexpected jump in building approvals growth," says Sue Trinh with RBC Capital Markets.

Details contained in the report confirmed May's 2.5% decline was likely a data issue with Queensland approvals rebounding from their extreme fall.

"Outside of this, the picture is more mixed but is clearly not showing the anticipated weakening, particularly across high rise which recorded another relatively strong month," says Matthew Hassan, a senior economist at Westpac.

Australian dwelling approvals have contracted in three of the six reported months for 2018 so far, with markets taking this and a concurrent fall in transaction volumes across key metrolpolitan centres like Sydney and Melbourne as signs that a housing market collapse is on the way. While most analysts appear to agree the Aussie housing market may slow further in the months ahead, a collapse of the 2008 order remains a distant prospect.

"Other housing market indicators have shown a clear softening in recent months. In particular, auction clearance rates have slipped well below average in both Sydney and Melbourne. That raises the likelihood of a renewed slowdown in building activity, particularly given a tighter funding environment," says Hassan. "However, the continued resilience in dwelling approvals means the effect of a renewed slowdown on construction and economic activity will come through later in the piece, i.e. 2019 and beyond."

Separately, Reserve Bank of Australia data showed the value of new loans to housing investors declined by 0.1% during June, the first decline recorded since February 2009, while personal credit was broadly unchanged and business credit growth expanded by just 0.3%.

"Despite the strength in June, we continue to think that we are past the peak in new housing approvals and the ongoing tightening of credit is likely to see approvals continue to trend lower," says Felicity Emmett, an economist at Australia & New Zealand Banking Group (ANZ). "The data show that the housing credit impulse continued its downward trend. As long as this remains the case, housing prices are likely to keep falling, which is what we expect."

Markets care about the buidling approvals data not only because the housing market accounts for a meaningful amount of commercial activity because it also acts as a barometer for firms' and household confidence in the economy.

Rising numbers of approvals, developments and sales can inspire confidence about the outlook for the economy, which may have an impact on expectations for inflation and interest rates.

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

The Reserve Bank of Australia has held its interest rate at a record low of 1.5% for 23 consecutive months, citing below-target inflation and a debt laden household sector that it says is ill-equipped to handle the pressures of higher borrowing costs given years of weak wage growth. Markets do not see a change in policy coming until at least the middle of 2019.

This is a double negative for the Australian Dollar in today's market given that other central banks are expected to carry on raising their own interest rates in the interim period. The Aussie has long enjoyed support from interest rates that were typically higher than those elsewhere in the developed world.

However, the deterioration of the outlook for Aussie interest rates, at a time when the US Federal Reserve and other central banks are raising their own rates, has incentivised investors to sell the Australian Dollar in favour of buying Pounds, US Dollars and other currencies.

As a result, Australia's Dollar has now lost 5.19% against the US Dollar in 2018 and 2.99% against Pound Sterling, although it has fallen further than that in recent months, because it had risen by similar measures during the first quarter of the year.

The AUD/USD rate was quoted 0.20% higher at 0.7422 Tuesday while the Pound-to-Aussie rate was down 0.17% at 1.7700. The Aussie was also quoted higher against all other developed world currencies during the morning session.

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