Housing sector needs another rate cut

The Reserve Bank of Australia's latest interest rate cut will provide a boost for housing construction - but it may not be enough to lift the struggling sector to where it needs to be.

Westpac senior economist Matthew Hassan said the RBA may need to cut again in February to spur enough growth in the underperforming industry to help offset the drag on the economy from the mining sector, once the investment boom peaks in 2013.

"So from our point of view a rate cut today and in February is very important for making sure dwelling construction is strengthening enough to offset the drag that is going to be coming from the mining sector," he said on Tuesday.

But Mr Hassan said it could take between six and 12 months before Tuesday's interest rate cut is felt by the housing market.

Figures released by the Australian Bureau of Statistics (ABS) on Tuesday showed a sharp drop of 7.6 per cent in residential building approvals in October.

The bigger-than-predicted fall came despite the Reserve Bank of Australia (RBA) cutting rates by 1.5 percentage points between November 2011 and October.

The RBA cut rates by 0.25 percentage points on Tuesday, bringing the official cash rate down to three per cent, its lowest level since 2009.

October private sector house approvals fell 1.5 per cent from September, while approvals for other private sector dwellings, such as units, fell 18 per cent.

Macquarie senior economist Brian Redican said the fall in private sector house approvals is the best indicator of underlying demand.

"They are still well below the levels we saw at the start of the year," Mr Redican said.

"I think that underlines, from our perspective, one of the challenges for the Reserve Bank in terms of trying to get traction on the housing market, and for it to drive growth once mining investment has peaked."

Master Builders chief executive Wilhelm Harnisch said the "surprising" fall in approvals is further confirmation that new home buyers and investors remain cautious.

"The size of the fall has come as surprise to the building industry," he said in a statement.

But JP Morgan economist Stephen Walters said the effect of previous rate cuts was still trickling through to the sector.

"We've been waiting to see how long these lags are," he said.

"They look pretty long given the RBA has been cutting for a year now and we've still got building approvals plunging at a pretty alarming rate."

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