New home sales rise 2.5% in January but first home owner demand still low, HIA claims

New home sales increased by 2.5% in January despite negative sentiment from natural disasters, but the Housing Industry Association warns that growth won’t be sustained as new home buyers back away in anticipation of more interest rate hikes.

That prediction has been bolstered by new building approvals data released this morning, which found that total approvals plunged by a seasonally adjusted 15.9% in January to just 12,342.

The ABS said approvals for houses dropped by 2.4%, and approvals for other types of dwellings fell by a massive 30.8%.

The results highlight just how big an impact the natural disasters have had on the construction and building markets.

The latest Housing Industry Association new home sales report found new home sales increased by just 2.5% in January, with detached sales rising by 2.2% and multi-units rising by 5%.

HIA economist Matthew King says the result is pleasing, especially given the impact of floods in Queensland, and says the activity could represent the expected sentiment in the market over the next few months.

“Certainly the signs are good for the early part of 2011. We’ve had rates on hold for awhile, and there are early signs that rates could well be on hold for quite a few months now,” he says.

“That would certainly be helpful to new home sales and the new homes market in general.”

However, King points out there are plenty of obstacles – supply is still limited, and he says the HIA is increasingly becoming aware of problems with residential land restrictions.

“We’ve had a period of a year or two now of sustained population growth, and yet land sales and supply simply haven’t kept up. We’re at a point where supply side obstacles are going to intensify.”

King also says the number of first home buyers entering the market is likely to be low, even with rates remaining on hold for a while.

“There was quite some demand pulled forward by the home owner grants, and we’ve probably seen that demand go there. There are some markets with a rejuvenation in activity, particularly in Western Australia, but it’s hard to see a great deal of incentive.”

“It’s hard to see them coming back when at this stage, it’s pretty clear that we’re going to see at least two rate hikes by the end of the year.”

So given that prices are low, and buyers are still backing away due to the threat of interest rate hikes, new home sales won’t be contributing much to overall price growth this year, King says.

“We expect fairly modest trajectories for prices this year. We’re expecting that overall conditions will remain soft and don’t see why prices will grow substantially. There won’t be any major corrections either, the underlying demand is strong, but growth will be fairly flat.”

The HIA found sales increased by 10.3% in New South Wales, by 9.6% in Victoria and by 6.3% in Western Australia. Sales fell by 2.6% in Queensland, while sales in South Australia fell by 6.3%.