Nikko AM Australia has warned investors that the lull in construction approvals the two states are experiencing now will materialise in the market by the end of 2017.
“If you look at building approvals though the end of 2016, they’re down 10 per cent year-on-year and are starting to really fall back from what were the 2014 and 2015 highs,” fixed income portfolio manager Chris Rands said.
“When you think about building approvals, it takes some time to go from approval to construction to completion [so] even though they’re falling now, we’re probably not going to see that effect until the end of 2017.
“It’s going to be the NSW and Victorian economies that slow down more than the other states.”
The fall in construction was the inevitable consequence of the boom experienced throughout 2014, 2015 and much of 2016, fuelled by falling interest rates and a pick-up in residential spending.
With the RBA appearing content to allow rates to remain at current levels for some time, it is unlikely to react to the fall in construction, Mr Rands said.
“[The RBA is] probably going to be reluctant to cut again and give the housing market another kick, while on the flip side there’s not going to be a lot of pressure to hike because they’ll be looking at this 12-month construction picture and be worrying about that as well.”
Meanwhile, other mining states could be supported by the recent commodity rally, although there are still concerns about its longevity.
“On the flip side of that are commodities which are up very strongly year-on-year,” Mr Rands said.
“[However,] the investment in the commodity space probably won’t come back as quickly [as] there’s a lot of people who aren’t sure whether the rally in iron ore is going to hold and that probably will delay investment decisions.”