UPDATE: Australian Housing Finance Still Firm On Stimulus

SYDNEY -- Australian housing finance grew in June, albeit at a slower pace than expected, as low interest rates and government stimulus continued to support the sector.

The number of housing-finance approvals in Australia rose a seasonally adjusted 1.1% in June from May, the Australian Bureau of Statistics said Monday. Economists surveyed ahead of the announcement on average had expected a rise of 2.0%.

Finance for construction of new homes rose 2.8% in June, while finance for the purchase of new dwellings fell 0.2%, the ABS said.

Economists said housing finance remains at strong levels historically, but fears are growing that the sector could weaken over the medium term if interest rates rise and as government grants for first home owners are scaled back.

First home owners accounted for 27.1% of housing finance in June, down slightly from 28.5% in May, the ABS said.

Stephen Roberts, chief economist at Nomura Research, said housing demand has spiked higher so far in 2009, but added that it "could come back a long way" over the medium term.

To combat the effects of the global financial crisis, the government has offered generous grants to new home buyers. However, that stimulus is set to be scaled down over the next six months.

A 1.1% fall in the value of investment housing finance in June could be an early sign that the housing sector is about to slow, Roberts said.

One of the main concerns for the Australian economy in the second half of 2009 is that growth will slow as generous fiscal stimulus is wound back.

"We expect that home loan demand will moderate further in the second half of 2009," said Helen Kevans, economist at JPMorgan. Tight bank lending standards and rising unemployment will also put a brake on housing activity, she said.

The RBA last week sharply upgraded its forecasts for Australian economic growth, while financial markets have priced in interest rate hikes starting in November. But the central bank acknowledged consumer spending will likely drop as the government's economic stimulus winds down.

Official interest rates in Australia were cut a total 425 basis points between September 2008 and April 2009 to a 49-year low of 3.0%. Economists generally expect interest rates to rise from early 2010.