WESTPAC: The spike in Australian apartment approvals creates more questions than answers

Property jeopardy anyone? Photo: Getty Images

Australia’s astronomically high building approvals figure for July — the second highest monthly total on record — has created more questions than answers when it comes to the outlook for the nation’s residential construction.

Source: Westpac

Is the expected slowdown in construction going to be far milder than what many had imagined? Given many approvals are for high rise apartments, will they actually all get built given concerns surrounding supply gluts in some areas and recent restrictions placed on foreign and local investors? And if they all get built, will it lead to a slowdown in house price growth, or worse, lead to increased settlement risk for those who bought off the plan?

These are just some of the uncertainties that the markets are grappling with, and floated by Matthew Hassan, senior economist at Westpac, following the release of the July report.

This paragraph from Hassan sums it up nicely:

The jump in approvals this month clearly casts doubt on the extent of any slowing in dwelling construction medium term. The pipeline of projects remains large and with a heavy skew towards high rise the associated work flow is likely to extend well into 2017. Indeed, near term work done still looks set for solid gains. On balance we continue to expect some wind back in approvals in coming months – the detail provides sufficient indication of a cyclical softening that should continue even with recent interest rate cuts. The key uncertainties still surround high rise activity – will building in the segment wind back and, if so, how rapidly and to what ‘base’?; and could we see a significantly higher ‘drop-out’ rate, i.e. approved projects being shelved rather than built? Add to these imponderables the impact of the mining downturn on different regions; the potential for pockets of oversupply in some market segments; and policy measures running in opposite directions (tightening in investor credit criteria and regulatory requirements vs reductions in interest rates) and assessing the medium term outlook is far from straightforward.

As we said, more questions than answers, fitting with the mix of Australian housing data seen in recent weeks.

On one hand auction clearance rates and house prices are pushing higher while at the same time housing credit growth and new home sales are slowing.

We’ll get further clarity on the house price picture later this week with CoreLogic due to release its monthly house price index on Thursday.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.