Australian building approvals jumped by the most in nearly three years in July, snapping the downward trend seen in previous months.
According to the Australian Bureau of Statistics, approvals jumped by 11.3% to 20,987 in seasonally adjusted terms, the largest percentage increase seen since September 2013.
It was well above the flat reading expected, and followed two months of modest declines. Putting the total in perspective, it was the second-highest monthly total in the history of the release, second only to the 21,141 figure seen in May last year.
While an impressive headline figure, it was entirely driven by a surge in high density housing approvals, doing little to disperse growing concerns of an apartment glut forming in some parts of Australia’s largest cities.
According to the ABS, private sector dwelling approvals ex-houses — namely apartments — surged by 23% to 11,393, leaving them up 15.7% on the levels of a year earlier.
Like the headline reading, it was the largest monthly total since May last year, and the second largest in the history of the survey.
In a note earlier this week, Paul Brennan, Josh Williamson, and Vivian Jiang of Citi’s economics research team, echoing concerns of others including the Reserve Bank of Australia, warned that the enormous lift in apartment construction risked exacerbating oversupply concerns in parts of Melbourne and Brisbane, Australia’s second and third-largest cities.
“Brisbane already is in oversupply, and Melbourne is on the way to oversupply,” the Citi team wrote. “When account is taken of approvals, only Sydney has underlying demand slightly higher than the level of approvals. This reflects the relatively greater scale of previous undersupply in Sydney in the ten years prior to the current construction boom.”
Citi suggested that “the extent of oversupply will depend on whether developers proceed or not with all the approvals to build… If this trend [of building all approvals] continues, as seems likely given no prospect of the RBA tightening, the risk of oversupply will increase”. In their view, “the developing oversupply will continue to build into 2017 and 2018”, and that “will intensify settlement risks which so far are low”.
In original terms, there were 1,303 residential building approvals granted in structures of four storeys or more in Queensland during July, leaving the annual increase at 15,561.
In Victoria, the July figure stood at 2,173 — the highest since October last year — taking the annual increase to 18,2016.
New South Wales, high rise residential approvals totaled 4,237 in July, the largest monthly total on record. At 32,060, annual approvals in these structures also sits at a record high.
Though the apartment approval pipeline strengthened, it was a different story for private sector house approvals which slid by 0.5% to 9,342, leaving them down 2.9% from a year earlier.
At 2,039, the differential between dwelling approvals ex-houses and actual houses was the largest on record.
Including both the private and public sectors, housing approvals totaled 116,945 over the past 12 months, shaded by approvals excluding houses which numbered 118,050.
In absolute terms, there were 234,996 dwellings approved over the past 12 months, down marginally on the record level of 240,880 seen in the year to October 2015.
Fitting with the strength in the number of dwellings approved, the ABS said the value of approvals rose by 3.2% in July, led by a 6.2% surge in the value of residential approvals.
That helped to offset a 2.5% drop in the value of non-residential building approvals following a 16.5% surge in June.
Following the release of the July report, UBS’ Australian economics team of George Tharenou, Scott Haslem and Jim Xu wrote that housing is “still on a tear”, suggesting that residential construction will add to economic growth again next year.
“The prior backlog of approvals/commencements still implies that dwellings completions (i.e. housing supply) will increase significantly further from now, and will not actually peak until 2018,” they wrote.
“Dwelling investment seems likely to continue to rise in 2017, which provides a key support to our recently upgraded GDP forecast for above consensus growth of 3% y/y in 2017.”