Construction sector recovering slowly

The recovery in Australia's struggling housing sector endured a setback in December as building approvals suffered a surprise fall.

Residential building approvals fell 4.4 per cent, seasonally adjusted, in December but gained 9.3 per cent over the 2012 year, figures released by the Australian Bureau of Statistics (ABS) on Monday showed.

Economists had expected a one per cent rise for December.

The data is known for its month-to-month volatility, and follows a 3.4 per cent gain in November.

CommSec economist Savanth Sebastian said there was no need to get overly concerned about the December fall.

"There is a clear underlying improvement taking place," he said.

Mr Sebastian said approvals were up just shy of 10 per cent over the year and, coupled with the recent upbeat new homes sales figures, it was clear that the housing sector was gathering momentum.

"It's certainly improving off a low base, but there is no significant revival in new approvals coming through," he said.

Mr Sebastian said he didn't expect the December building approvals figures would cause the Reserve Bank of Australia (RBA) to make another rate cut at its first meeting of the year on Tuesday.

"I think they'd certainly be looking at the global economic conditions," he said.

The central bank is widely expected to keep the cash rate at three per cent, after cutting it by a quarter of a percentage point in December, October and June, as well as a half a percentage point cut last May.

Master Builders chief executive Wilhelm Harnisch said the building approvals data confirmed the building and construction industry was still at a very early stage of recovery.

"In trend terms, growth in the number of building approvals remains marginally positive," he said.

The ABS estimate of the trend in building approvals - a smoothed-out version of the seasonally adjusted estimate - rose by only 0.5 for December.

"The industry is looking to last year's rate cuts to bolster new home buyers' interests in the coming months and provide a much needed boost to the industry," Mr Harnisch said.

"New home buyers are in a unique position to capitalise on the current soft conditions."

JP Morgan economist Tom Kennedy said 2012 had been a challenging year for the construction sector.

"Unfortunately the construction sector still faces various structural and fiscal headwinds, which leaves us sceptical that lower rates will be sufficient to engineer a recovery that will make up for the falling growth," Mr Kennedy said.

"When you look at the number of building approvals in level terms, they are significantly lower than they were in 2010 and 2009.

"If you want to see those levels return, I think the RBA is going to have to provide a bit more of an accommodative stance (on interest rates) over the coming months," he said.

Mr Kennedy said an improving outlook for the global economy, including stronger growth in China, meant the RBA would keep the cash rate on hold at its February board meeting.

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