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CHART: Australia is in an epic building boom while a key demand signal is tanking

Keystone Features/Getty Images

Thinking about buying one of those swanky off the plan apartments in inner city Sydney, Melbourne or Brisbane? You know, the ones that have billboards the size of tennis courts out the front that are plastered with names that sound like Greek and Roman gods.

If you are, you might want to look at this chart carefully and factor it into your decision.

Courtesy of UBS Australia’s economics team of Scott Haslem, George Tharenou and Jim Xu, it investigates the historic relationship between Australian building approvals and “whether now is a good time to buy a dwelling”, a component in the Westpac-MI consumer sentiment survey.

When the sentiment data is advanced by 12 months, as it has been in the chart, it’s clear there’s a fairly strong historical relationship between the two. But in the last couple of years this has completely broken down.

All of a sudden the relationship has been shattered, with building approvals surging higher while at the same time sentiment fell. Supply, based on a majority of approvals becoming actual stock, is exploding just as demand is soft.

In housing, like any market, supply outstripping demand has the potential to see prices decline, something those in Nevada, southern Spain, Ireland and third and fourth tier cities in China know all about.

This is not to suggest that a cataclysm of that scale is coming for Australia – for a start, a large proportion of new supply in these areas is being absorbed by foreign buyers – but it does raise the question of whether this time really can be different.

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