CITI: Just because Australian apartment approvals are booming doesn't mean they'll all get built

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Based on July’s enormous building approvals figure, the second highest number in the history of the ABS survey, it seems that a lot of apartments are going to be built in Australia in the years ahead.

According to the Bureau, approvals jumped by 11.3% to 20,987 in seasonally adjusted terms, the largest percentage increase seen since September 2013. Most of them were units, particularly in high rise structures.

While the approvals figure suggests that residential building activity will continue to boom well into next year, there’s one small complication — these are approvals, not building starts or completions.

Given apartment commencements and those already under construction are both running at the highest levels on record, there are some who believe there’s a risk that many of these approvals will be delayed, or indeed never get built.

Josh Williamson, Vivian Jiang and Paul Brennan, Citibank’s Australian economics team, believe the risks are clearly building (excuse the pun), reiterating the concern expressed in a research note released by the bank earlier in the week, before the building approvals data hit.

“There is a growing risk that a number of approvals will not turn into dwelling starts or be delayed,” say Citi. “We only suspect that Sydney has the underlying demand to absorb such a large increase in building approvals into the supply chain.”

The two charts below from Citi shows approvals, completions and underlying demand estimates for the Sydney housing market, comparing them to those for Brisbane, the city it suggests is “already in oversupply”.

Here’s Sydney:

And here’s the same chart for Brisbane:

In Australia’s largest city, approvals are only just starting to catch up to underlying demand for housing, in stark contrast to that seen in Brisbane.

The concern expressed by Citi was echoed by Cameron Kusher, a research analyst at CoreLogic, who suggested last month that the enormous surge in high density housing supply not only raises risks of oversupply in some areas, but also the prospect that some projects will never be built.

“There are though concerns of ‘over-building’ in some areas, especially considering in certain locations much of the new unit supply is targeted at investors rather than the owner occupier market,” says Kusher. “Given the challenges in securing enough pre-sales to trigger the commencement of some projects, over the coming quarters, we’re expecting that some projects will not begin construction.”

It’s a good reminder that just because buildings have been approved for construction, it doesn’t automatically imply that they’ll actually get built.

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