Australia’s home-loan approvals fell by the most in eight years in May as the highest interest rates since 1996 and rising costs for building products damped demand for property.

The number of loans granted to build or buy homes and apartments dropped 7.9 percent from April, when they declined a revised 4.2 percent, the statistics bureau said in Sydney today. The drop was four times as much as the median estimate of a 2 percent decrease in a Bloomberg survey of 21 economists.

Weaker lending, coupled with reports today that showed consumer confidence slumped to a 16-year low and building work fell, add to signs the economy is slowing. The figures may reinforce speculation the central bank will refrain from raising borrowing costs again after four increases since August.

“The housing market is responding to the rate rises,'’ said Kieran Davies, chief economist at ABN Amro Australia Ltd. in Sydney. “The Reserve Bank will be happy to leave rates on hold.'’

The decline in approvals was the biggest monthly drop since June 2000. Loans are at the lowest level since October 2004.

The Australian dollar fell to 95.04 U.S. cents at 12:05 a.m. in Sydney from 95.14 cents before the report was released. The two-year government bond yield dropped 1 basis point, or 0.01 percentage point, to 6.67 percent.

Consumer confidence plunged 6.7 percent to the lowest level since 1992, Westpac Banking Corp. reported today.

Construction Decline

An index measuring construction work contracted for the first time in four years, according to a Master Builders Australia survey released in Canberra today. The index, from 848 builders across Australia, fell to 47.2 from 54.3. A reading below 50 indicates building will decline in the next six months.

Mirvac Group Ltd., a Sydney-based apartment builder, said on June 20 that 12-month earnings may be as much as 8.5 percent lower than previously forecast.

Higher borrowing costs are slowing the $1 trillion economy, which the central bank says will ease the fastest inflation in almost two decades.

The Reserve Bank kept the overnight cash rate target unchanged at 7.25 percent this month. Governor Glenn Stevens raised the benchmark by a quarter point in both March and February, and also twice in 2007.

“There has been substantial tightening in financial conditions since the middle of last year,'’ Stevens said on July 1. Consumer and corporate borrowing “has weakened significantly.'’

Interest Rates

Eighteen of 25 economists surveyed on June 30 said the central bank will keep the benchmark rate unchanged for the rest of 2008, six forecast an increase and one a cut.

The nation’s five largest banks have added an average of 90 basis points to home-lending rates in 2008. That’s almost double the central bank’s increases as lenders seek to recoup a surge in funding costs caused by the global squeeze on credit.

St. George Bank Ltd. increased its variable home-loan rate a further 0.2 percentage point to 9.67 percent, effective from yesterday. That adds A$10 ($9.60) to weekly repayments on an average A$250,000 mortgage, St. George said.

Rising raw-material and transport costs are adding to a slowdown in building work.

Prices for reinforcement steel used in housing have increased 60 percent in the past six months, according to the Master Builders Association of New South Wales.

`In the Doldrums’

“The housing industry is officially in the doldrums,'’ said Brian Seidler, executive director of the association. “And the rapidly escalating cost of building products is going to seriously impact any chance of a speedy recovery.'’

Boral Ltd., Australia’s biggest seller of building materials, said on June 27 that rising fuel prices are driving up costs. The company is raising prices to maintain margins, Chief Executive Officer Rod Pearse said.

“Clearly we have had significant and largely unanticipated cost increases over the last six months,'’ Pearse said in Brisbane. “Energy costs are moving at unprecedented levels.'’

The total value of lending dropped 6.1 percent to A$18.1 billion in May, today’s report showed. Lending to owner- occupiers declined 5.7 percent, while the value of lending to investors, who plan to rent or resell homes, fell 6.8 percent. bloomberg