- Australian building approvals rebounded modestly in September after an ugly plunge in August.
- The rebound was entirely driven by the volatile multi-dwelling sector, masking continued falls in housing approvals.
- Approvals in both categories have fallen heavily over the past year, especially for multis, indicating that Australia’s residential construction boom is now past its cyclical peak.
Australian building approvals rebounded modestly last month, partially recovering some of the steep falls recorded in August.
According to the Australian Bureau of Statistics (ABS), approvals rose 3.3% to 17,081 in seasonally adjusted terms in September, coming in marginally below the median economist forecast that was looking for a larger increase of 3.8%.
August’s decline, originally reported at 9.4%, was revised to show a slightly smaller yet still ugly plunge of 8.1%.
From a year earlier, total approvals fell by 14.1%, cementing the view that Australia’s residential construction boom is now past its cyclical peak.
Indeed, in rolling annual terms, 225,500 dwellings were approved over the past 12 months, down from the record peak of 242,300 set in the year to August 2016.
Tighter lending standards, continued property price declines and, at the margin, signs that population growth may be slowing, largely explain why approvals are currently falling.
The improvement in the headline figure in September was entirely driven by the multi-unit sector with approvals jumping 9.2% to 7,512. Despite the monthly increase, approvals in this category still fell 21.9% from the same month a year earlier.
In contrast, and perhaps more worryingly, approvals to build unattached homes continued to slide, falling 2.7% to 9,266, leaving them down 7.5% from 12 months earlier.
Housing approvals are typically more stable than those for multi-units with the latter often influenced by large, one-off apartment developments that causes volatility in the seasonally adjusted data.
“The monthly gain centered on the famously-volatile high rise unit segment, which had fallen sharply over the previous two months,” said Mathew Hassan, Senior Economist at Westpac Bank.
“The September bounce was also heavily concentrated in Victoria. Approvals outside of this narrow state segment were significantly weaker.”
Given the volatility in the latter, it’s often best to look at the ABS trend series to get a more reliable signal as to what’s actually occurring on the ground.
In September, total approvals fell 1.9% in trend terms, extending the decline over the past year to 12.9%.
Approvals to build houses and multi-unit dwellings fell by 1.5% and 2.7% respectively over the month, leaving the fall from September 2017 at 6.6% and 20.1%.
Mirroring the falls in the trend series, the ABS said the value of residential work approved in September slid by 1.3%, continuing the pattern seen in each of the prior eight months.
The value of non-residential construction also fell in trend terms, declining by 0.7%, the 14th monthly decline in a row.
Combined, the total value of work approved fell by 1.3%, extending the streak of consecutive monthly declines to 11.
Tom Kennedy, Economist at JP Morgan, summed up the September result perfectly, describing it as a “strong finish to a poor quarter”.
“While today’s print was better than we had expected, prior weakness means quarterly volumes are down sharply in Q3 with declines recorded in both the detached and high density subgroups,” he said.
“The drop in Q3 is of a similar magnitude to that reported in the June quarter and remains consistent with our view that residential investment will become a modest drag on real GDP growth over the next year.”
Looking ahead, Kennedy says the downturn in residential construction is likely to be most acute in the apartment sector.
“With the number of dwellings under construction still at elevated levels our expectation is for aggregate approval volumes growth to continue to move lower in 2019, with the adjustment likely to be concentrated in apartments given this is where the looming supply expansion is largest,” he says.
The results from the September building approvals report mirror those in the separate Performance of Construction Index (PCI) released by the Australian Industry Group.
“House building declined for a second consecutive month and at the steepest rate in just over two years while apartment building recorded a seventh month of contraction,” the Ai Group said following the release of its September PCI.
The group also noted that employment across the sector declined at the fastest pace in two years, hinting the downturn in the housing market may be starting to spill over into the broader Australian economy.
The construction sector is the third-largest employer in Australia, sitting behind healthcare and retail.