UBS: Australia's housing construction boom has a couple of years to run yet

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For the second month in a row, Australian building approvals tumbled in June, adding to evidence that Australia’s residential building boom is nearing, or perhaps at, its cyclical peak.

At 233,246, the number of building approvals over the past year is now 3.2% below the record-high of 241,016 struck in the year to October 2015.

It’s still extremely high, unprecedented compared to prior cyclical peaks, although it’s now clearly beginning to trend lower.

However, while approvals are now starting to decline, there’s still a whole lot of approved dwellings that are yet to be built.

According to analysis from Scott Haslem, George Tharenou and Jim Xu of UBS, supply growth in new housing still has a long way to go yet, suggesting that the cycle — even after the enormous surge in construction already seen — is only two-thirds complete.

The chart below, UBS’ housing supply tracker, shows where Australian dwelling completions currently stand from an annualised basis, along where they are expect new housing supply to head based on approvals and commencements data from the ABS.

“We find that although dwelling completions lifted to a record 190,000 now, the cycle is still only two-thirds through, and will likely peak at around 210,000 in 2018, up around 50% from 2012,” said the trio in a note released late last week.

In what will surprise few, particularly those who live in Australia’s eastern capitals, they note that “this lift is entirely driven by a super-cycle in multi’s (mainly high-rise apartments), skyrocketing another 50% to around 110,000, or double the pre-boom trend”.

“In contrast, supply of houses likely already peaked at around 118,000 — albeit a record high — and is set to retrace ahead,” the add.

While Haslem, Tharenou and Xu suggest that the surge in new construction poses upside risks for dwelling investment within Australian GDP, they also note that the building boom may have other consequences, including a spike in residential vacancy rates.

“The likelihood has increased that nominal rent and price growth will slow further ahead,” they note.

“Indeed, they will probably fall across some pockets of the inner-city rings in the capital cities where there is most new supply, albeit we still don’t expect a collapse of house prices.

“This view is also predicated by our forecast that the RBA will cut the cash rate by another 25bp RBA in August, which would support the housing market ahead,” they add.

Haslem, Tharenou and Xu believe that at the current pace of supply growth, Australia is “probably over-building relative to underlying demand of around 190,000 per annum.

However, they counter the risks posed by this development by acknowledging that “this followed a significant period of under-building in the 2000’s”.

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