Australia's new love for apartments could complicate the RBA's job

Photo; William West/AFP/Getty Images

Apartments have become an important part of Australia’s housing mix, which has several implications for interest rates, while a growing demand has the potential to complicate the Reserve Bank of Australia’s interest rate mechanism.

Given it takes longer to build large apartment buildings than detached houses, the effect from interest rate changes could consequently take longer to influence residential construction and demand, according to the central bank’s Bulletin.

The composition of housing construction in Australia has changed substantially over the past decade, as the chart below shows.

The number of apartments built annually has tripled since 2009, while the volume of standalone houses has hugged the average over the past decade.

Development and construction timelines for both detached houses and apartments are long and variable, and the time taken at each stage can vary greatly. The RBA says those differences are important to consider when assessing market conditions, including responses to changes in interest rates.

The RBA says:

Historically, dwelling investment in Australia has been very responsive to changes in monetary policy. Although it is difficult to formally test the relationship between interest rates and apartment activity with only a partly completed cycle, it is likely that the new apartment activity stemming from a change in interest rates will, on average, flow through to the economy over a much longer time period than for detached houses.

Apartment activity is being driven by costs. They are 30% cheaper than detached homes, which is pushing up demand, alongside changing lifestyles according to the RBA.

The increased length of construction, as this table below shows, also affects the interpretation of the pipeline as a leading indicator of dwelling investment, the bank says.

An approved apartment typically takes at least three times as long to complete as a detached house, which means that the pipeline of work provides information on dwelling investment further into the future. The shift in composition of approvals towards apartments, if sustained, would result in a larger pipeline of work.

The longer lag between the decision to build an apartment and its completion means the impact of changes on housing market indicators, including prices, rents and vacancy rates, may also be less predictable than in the past, the central bank said.

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