Media release: Massive bounce back in building approvals ahead of second interest rate rise and energy price spike in March

Key takeaways:

• Residential building approvals rebounded sharply in February (+29.7% m/m), largely driven by a surge in apartment approvals (+101.2%) following steep declines in prior months, indicating a recovery trend, but heavily skewed toward apartments.
• Detached house approvals remained stable (+0.2% m/m) and are modestly up year-on-year (+6.1%), suggesting a more gradual and less volatile recovery in that segment.  
• Conditions in the construction sector were relatively stable before March, with improved profitability compared to COVID-era challenges, supported by earlier lower interest rates and cost pass-through. 
• However, rising interest rates and a sharp increase in energy and material costs are expected to put pressure on the sector, with insolvencies likely to increase in coming months unless input cost pressures ease (e.g. via resolution of Strait of Hormuz disruptions). 

Bottom line: The massive rise in residential building approvals in February was not completely unexpected given the very large drops in the volatile apartment category experienced in December and January. This re-established the recovering trend for residential construction, though this is concentrated in approvals to build apartments. This data was of course before the RBA's second interest rate increase and the huge rise in energy prices during March. Construction is an energy-intensive sector, and the combination of higher interest rates and higher energy prices suggests insolvencies will begin to rise again in the sector in coming months. The best outcome would be a very swift resolution of the closure of the Strait of Hormuz, which would likely reverse much of the recent large increases in input prices. 

Key findings:

• Ahead of the RBA's second interest rate increase and the significant increase in energy prices in March, residential building approvals rose 29.7% m/m in February. This followed significant falls in January and December. 
• The bounce back as expected was very large, driven by the very volatile and lumpy apartment approvals category. This category had recorded falls of 29.7% and 25% in December and January, respectively. Apartment approvals surged 101.2% m/m, re-establishing the improving trend for residential construction approvals, though previous falls had not been assessed as a change in trend. 
• The less volatile and larger Private Sector House approval category was broadly unchanged in February (+0.2% m/m) and is now 6.1% higher than a year earlier. The improving trend for this series is now more well established, though is still relatively timid compared to previous cyclical upturns, likely in part reflecting already very elevated construction costs  

• Ahead of the energy price shock of March, the extent and duration of which remains uncertain, the NAB Business Survey reported that construction firms were experiencing reasonable business conditions and the profitability problems experienced during COVID had eased. That assessment is likely to change sharply when the March survey is released the Tuesday after Easter, with some high profile very large increases in some construction materials announced during March. The RBA's second consecutive interest rate increase will also be a headwind for the sector in the second half of 2026. 

• Lower interest rates last year and construction businesses adjusting to pass on higher input costs to consumers likely supported the levelling out in insolvencies over much of 2025, albeit at high levels. Recent increases in interest rates and higher input costs (if sustained) suggest insolvencies in the sector will likely rise again in the months ahead. A quick re-opening of the Strait of Hormuz would be the most helpful development to prevent this. 

Lily Cavan
Senior consultant
Recognition PR and Marketing 

Phone: 02 9252 2266

Email: lily_cavan@recognition.com.au