New supply is predicted to reach its lowest point over the last five years, analysis of ABS data indicates.
New data from the ABS shows building approvals have declined by 8.6 per cent over December to 13,995 properties.
Tasmania saw the largest decline in seasonally adjusted dwelling approvals in December 2018, dropping 24.3 per cent.
This was followed by NSW with 8.6 per cent, Victoria with 8.1 per cent, and then Queensland with 5.8 per cent.
Dwelling approvals rose the most in South Australia, by 5.6 per cent, and Western Australia with 1.1 per cent.
In trend terms, the Northern Territory saw a rise in dwelling approvals by 1.7 per cent, while the ACT saw a decline of 21.3 per cent.
The overall decline, according to Mr Reardon was due to multiple factors, which include taxes on foreign investors, a current record supply of apartments, declining house prices and the ongoing credit tightening.
“The credit squeeze that is impacting the market at the moment has accelerated the slowdown in approvals,” Mr Reardon said.
“HIA research has found that the time taken to gain approval for a loan to build a new home has blown out from around two weeks to more than two months.
“Policy makers and lenders alike need to be cognisant that ordinary home buyers are now facing blowouts in loan processing times and also much greater rates of flat-out loan rejection.”
Looking ahead, Mr Reardon said the approval slowdown is predicted to result in a building activity slowdown later in 2019.
“We’ve long been anticipating the current downturn in new home building, but there is a risk it could develop more quickly and strongly than expected,” he said.
“In particular policy makers and lenders will need to respond judiciously to the pending release of the banking royal commission’s recommendations.”