Interest rate impact hits housing approval levels

The fall was driven by a 3.6 per cent drop in the number of private dwellings being approved, not including houses, after it declined by 25.7 per cent in March.

However, bureau head of construction statistics Daniel Rossi said the number of dwellings being approved was still 10.2 per cent higher year-on-year.

"Private sector house approvals fell one per cent, but remain at elevated levels," he said on Tuesday.

"This is the third consecutive month with over 10,000 private sector houses approved. 

"The last time this occurred was during the final three months of 2021."

Westpac economist Neha Sharma said the approvals data was below market expectations and had returned to averages in 2025.

She said the increase in interest rates from the Reserve Bank had played a role.

"Approvals are likely beginning to reflect the effects of higher interest rates," she said.

"The outlook is complicated by a mix of factors. In the near-term, downside risks persist, including the potential for further rate rises and still-elevated construction costs.

"At the same time, recent budget announcements could support demand for new dwellings, although the timing and magnitude of any uplift remain uncertain."

The federal budget proposes changes to limit negative gearing to new properties from 2027 and scrap a 50 per cent discount on capital gains taxes to a rate based on inflation.

After the first data released since the May budget showed property prices falling in major capital cities, Treasurer Jim Chalmers said the market had already been experiencing a downturn in price.

"We had seen the housing market already softening a bit before the budget. The budget decisions, the tax reforms in the budget are not the only factor when it comes to the housing market," he told ABC Radio.

"What we want to see is ... first home buyers getting a fair chance at auctions, and so we're seeing that increasingly."

Dwelling values fell 0.9 per cent in Sydney and 0.8 per cent in Melbourne during May, according to data from research agency Cotality.

Housing Minister Clare O'Neil said the approval figures had shown an uptick from the previous year despite volatility driven by the war in the Middle East.

"This is particularly encouraging, as it provides our first look at housing activity since the start of the Middle East conflict," she said in a statement.

"The Middle East conflict will continue to put pressure on construction costs, but we're maintaining momentum, despite the challenging conditions."