PHILIPPE LOPEZ / AFP / Getty Images

Australian new home sales fell sharply in October, dropping to the lowest level seen in two years.

That’s the sobering news delivered by Australia’s Housing Industry Association (HIA) on Tuesday with the group reporting “sizeable” declines in sales volumes for both apartments and detached houses.

“Detached house sales were down by 8.2 per cent during the month, while multi-unit sales fell by 9.2 per cent,” said Shane Garrett, senior economist at the HIA.

Combined, total sales fell by 8.5%, leaving them at the weakest level seen since July 2014.

According to the group, the weakness in detached housing sales was concentrated in Victoria and New South Wales, the most populous states within Australia.

“The largest reduction in sales volumes during the month was in Victoria (-20.4%), with new detached house sales also falling in Western Australia (-5.6%) and New South Wales (-2.8%),” said Garrett.

Those declines were partially offset by an increase in sales in Queensland and South Australia of 4.5% and 0.8% respectively.

Despite the ugly headline drop, Garrett says that he wasn’t surprised by the result, noting that Australia is now coming to the end of its longest and strongest new home building upturn on record.

“October’s new home sales results are consistent with HIA’s latest forecasts for new home building starts which foresee a reasonably marked reduction in activity over the next couple of years,” he said.

“Even so, activity is projected to fall to a low point of around 172,000 new dwellings starts during 2018/19, about the same as the average of the past decade.”

In its latest National Outlook report, released earlier this month, the HIA said that new residential building would slow over the next two years, led by a sharp drop in apartment construction.

“From their peak of 117,000 in this calendar year multi-unit commencements are expected to fall by over 40 per cent by 2018/19,” the group said.

It predicts that detached home construction will fare better over the same period, forecasting that annual starts will moderate to 103,000 in the 2018/19 financial year, down 9% on current levels.

Source: HIA

While Garrett is not concerned by the weakness in new home sales seen in October — he is, after all, expecting starts to moderate — the sharp decline does raise questions over current levels of demand for new housing, particularly in the nation’s largest housing markets, New South Wales and Victoria.

Although off the highs seen in mid-2015, Australian building approvals continue to sit at elevated levels, led by a strong pipeline of work in Australia’s southeastern corner.

If demand for new housing is already starting to weaken, it could mean that many of these approved dwellings — a large proportion of them units — will not get built.

This will warrant close monitoring over the months ahead, although, at this point, there’s no need for alarm.

Indeed, one look at the chart below, supplied by the HIA, shows that sales volumes tend to chop around, often plunging one month before rising solidly the next.

Excluding monthly volatility, sales are now starting to soften, fitting with the sentiment expressed by Garrett. This will only become a problem for the residential construction sector, and the broader economy, should the weakness become more pronounced in the period ahead.

Markets will get further news on this front later in the week when the ABS releases building approvals figures for October on Wednesday, November 30.

In September, the ABS said that approvals fell by 8.7% to 18,945, a much bigger decline than the 3.0% fall expected. It left total approvals down 6.4% on the levels of a year earlier.

Over the past year, approximately 237,932 dwellings were approved, down 1.4% from the all-time record peak of 241,331 seen in late 2015.

There were 117,668 houses approved over this period, the fewest seen since February 2015. Approvals for dwellings excluding houses, almost entirely apartments, stood at 120,264.

A large pipeline of work still to come, even before recent weakness in new home sales is taken into consideration.

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