Australia looks set to build a lot more houses in the years ahead

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  • Australian building approvals fell in April, dragged lower by a sharp plunge in apartments.
  • Approvals for houses are trending higher, offsetting a slowdown in approvals excluding houses.
  • The data suggests recent weakness in home prices in Sydney and Melbourne is yet to have a meaningful impact on new housing supply.

Australian building approvals fell in April, dragged lower by a sharp plunge in apartments.

According to the Australian Bureau of Statistics (ABS), approvals fell 5% to 18,701 in seasonally adjusted terms, leaving the increase on a year earlier at 1.9%.

In the private sector, approvals for houses was near flat from a month earlier, lifting 0.1% to 10,446. That left approvals for unattached dwellings up a healthy 11.1% from a year ago.

Explaining the headline weakness, private sector dwelling approvals excluding houses — largely reflecting apartments — tumbled 11.5% to 8,083, leaving them down 7.5% over the year.

In dollar terms, the value of total building approved fell 4.2% after seasonal adjustments. Both residential and non-residential softened, falling 4.3% and 4.0% respectively.

Growth in apartment approvals in recent years — often in large complexes — has meant the headline approvals figure is now incredibly volatile as large developments enter and exit the data series.

That means trend data from the ABS often provides a better indication on what is truly going on.

Based on the figures released in April, there are few signs that weaker home prices in Sydney and Melbourne are leading to a reduction in approvals.

They were nearly unchanged at 19,038 last month, an increase of 5.7% on 12 months earlier.

Approvals for private sector houses and other dwellings both increased over the year, lifting by 9.4% and 2% respectively to 10,412 and 8,447.

“While approvals for detached houses were broadly stable this month, they have been trending higher since mid 2017,” said Kristina Clifton, senior economist at the Commonwealth Bank.

“This is largely because of a lift in housing approvals in Victoria.

“Strong population growth and a relatively large supply of land compared to Sydney means that more detached housing can be built in the greater Melbourne region.”

As seen in the chart below showing both the ABS seasonally adjusted and trend series, the proposed pipeline of residential construction work still remains at historically elevated levels, especially for houses.

As a lead indicator on residential building, economists believe the data points to a solid pipeline of work to come.

“The approvals data provide further evidence that residential building approvals are around the peak. But even if they fall from here, the backlog of work remaining will keep housing investment elevated,” said Daniel Gradwell, economist at ANZ Bank.

“Our favourite leading indicator, housing finance, suggests that we are around the peak in the building approvals cycle.

“However, the volume of work already under construction will continue to support dwelling investment through 2018.”

Henry St John, economist at JP Morgan, agrees with Gradwell’s assessment.

“The pipeline of residential building work commenced or yet to be done remains strong, and we expect it to remain modestly supportive for growth for some time.”

However, while the pipeline for residential construction remains strong, there’s now growing evidence to suggest that non-dwelling construction could slow quite sharply next year.

“Monthly approvals are now 20% lower than a year ago and are trending lower across most types of property, with the clear exception of accommodation,” says Gradwell.

“While the strength in approvals of offices and industrial property in 2017 suggests that activity should remain elevated in the near term, the recent downturn in approvals is challenging our outlook for ongoing strength in non-residential activity into 2019.”

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