The number of dwellings approved for construction fell 4.4% in December in seasonally adjusted terms, following a rise of 3.4% in the previous month.
Over the calendar year, dwelling approvals are up 9.3% with units up 31.7% but houses down 3.8%.Westpac says the fall in December building approvals provided a weaker than expected finish to 2012 with market expectations of a 1% gain in December and Westpac's forecasting a 1% decline.
Approvals for private sector houses fell 3.3% in December while unit approvals fell 5.4%.
The fall in private sector house approvals was led by Victoria (-12.7%) and Western Australia (-2.2%), but approvals rose in South Australia (9%), Queensland (5.2%) and New South Wales (1.2%).
South Australia, Queensland and NSW all have state incentives favouring first-home buying buying or building a new home or apartment.
Westpac says the sharp drop in private sector house approvals concentrated in Victoria, suggests the December figures should be treated with some caution.
"The significance of the weak December approvals reading hinges on how the Victoria numbers are interpreted.
"On the one hand there may have been a significant policy-induced 'hole' in approvals in the month.
"The Victoria state government changed its incentives for first-home buyers in 2012 from a grant of up to $13,000 to significant stamp duty concessions (both only available on properties up to $600,000).
"The gap may have encouraged many to delay building, particularly late in the year.
"However, this explanation doesn't quite hold together - state figures on housing finance approvals suggest FHB activity held up in Victoria late last year, despite the transition.
Other indicators – consumer sentiment towards housing and house price expectations – did fall away in Vic compared to other states.
"Adding to the puzzle is the tendency for upward revisions to approvals estimates due to late arriving data - this may be more of a factor around the Dec-Jan period.
"However, the transition period was not smooth with the grant phasing out at the end of June and stamp duty concessions coming into effect in January.
"The gap may have encouraged many to delay building, particularly late in the year," says Westpac.
Across both house and units, dwelling approvals decreased in December in Tasmania (-21.8%), Victoria (-12.3%) and New South Wales (-1.3%) but increased Queensland (7.9%), South Australia (1.7%) and Western Australia (1.3%) in seasonally adjusted terms.
The value of total building approved fell 1.9% in December, in seasonally adjusted terms, and has fallen for three months.
The value of residential building fell 3% while non-residential building rose 0.1%