Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Thursday, 17 April 2014

Here comes Australia's (apartment) construction boom

Boom or no boom?

There has been a lot of lively debate about Australia's housing markets over the past decade, and I make no apologies for having situated myself towards the bullish end of the spectrum for most of that time.

I was never in agreement with the crash predictions before, during or immediately after the financial crisis, largely due to supply issues and falling interest rates.

Then there were claims that credit growth would not be able to see prices rebound, instead seeing prices melt away - that didn't fit with my (perhaps old school) view that property prices cycle and would be more likely to pick up again when interest rates fell.

But what about the residential construction boom? 

The pessimistic view over recent years has been that land prices would be too high and therefore could not allow a construction recovery to replace the fading mining construction.

My own view has been there certainly would be a construction recovery since low interest rates (and the associated ease of financing) and rising dwelling prices would make it so. Developers tend to need rising prices and reasonable financing costs to become incentivised to build.

The actual answer to the riddle is that Australia's construction boom is already underway, but it will be markedly different from those seen in times past.

Dwelling units commenced

Yesterday's data showed building activity which runs to December 2013 to be still relatively sedate.

However, building activity to December 2013 is retrospective data.

What we're really interested in is what is in the pipeline, which is shown by the dwelling units commenced figures (click chart).

What yesterday's data showed is that Australia's residential construction is now firmly on's almost exclusively being driven by a massive increase in the number of units and apartments being built.

As you can see, apartments and units now account for more than four in every ten new dwellings being built, which represents a huge structural shift on what we have seen in decades gone by.

This is particularly so, as you might expect, in cities such as Sydney, Melbourne and Darwin where desirable land made available for development has been scarce.

In seasonally adjusted terms, the number of dwelling commencements increased by 8.2% in the 3 months to December, with multi-unit commencements increasing by a whopping 21.3% in the quarter. 

The rolling annualised number of apartments and units commenced in the December quarter therefore hit an all-time record high, and, based upon recent approvals data, I wouldn't mind a bet that a new record high is recorded in the March 2014 quarter too (click chart).

Since the September 2009 quarter, the rolling number of apartments and units commenced has nearly doubled, showing a massive increase in starts of 96%.

The key takeaway is that Australia's apartment construction boom is underway.

A few observations

Firstly, the level of dwelling construction is now clearly set too boom, following on from the building approvals data which has soared to decade highs.

This is great news for the Australian economy, and it the construction is certainly needed.

When adjusted for the boom in population growth, then dwelling unit commencement figures have actually been fairly soft in relative terms in recent years adding to the upwards pressure on dwelling  prices.

However, apartment construction in itself is unlikely to plug the hole left by the mining boom, since the construction value per dwelling is clearly lower for apartments and units than it is for detached houses. 

The Reserve Bank will certainly need other sectors of the economy such as commodity exports and retail sales to do their share of the lifting, and therefore the cash rate may not be adjusted upwards towards a normalised level for a little while yet, pending the outcomes from next week's inflation print.

Thus, while futures markets have priced out further interest rate cuts (and even Bill Evans and Westpac have given up the ghost on forecasting any more cuts), on balance market are not yet expecting to see a hike until some time in the middle of 2015 (click chart).

Given that there is a lag in the effects of monetary policy and that multi-unit projects can take 2-3 years to come online, I believe that this apartment construction boom is one which could run and run over the few years ahead.

For this reason, budding homeowners and property investors need to be very savvy about what property types they buy and where.

State by state thoughts

A final observation for today is that the apartment commencement data is very uneven by state.

Very strong data was recorded for Queensland dwelling commencements (+15.8% q/q) and especially South Australia (+25.2% q/q) where dwelling commencements were pulled forward due to the Housing Construction Grant.

On the other hand commencements fell in Canberra/ACT (-13.3%), Tasmania (-12.6%), Western Australia (-1.3%) and Northern Territory (-26.6%). 

Perhaps surprisingly, New South Wales showed a pick-up of only 2.8% in the quarter (although from a high-ish base) yet Victoria showed a monster pick-up in multi-unit commencements of 33%.

This little snippet of data provides one small clue as to why property investors might marginally favour Sydney over Melbourne as their city of choice.

Both cities have fantastic fundamental attributes for investors, including vast ongoing population growth and diverse employment markets.

But Sydney has one key difference, being the artificial supply constraints due to its geographical footing.

Since Greater Sydney is enclosed by the Blue Mountains, national parks and an ocean, the only realistic direction for us to build significantly more dwellings is upwards.

Unfortunately, gaining the requisite approval to build larger multi-unit dwellings in desirable locations is difficult, and development costs on brownfield sites are high, as I analysed in some detail here.

We have seen this week that Parramatta's new 90 storey Aspire tower will include 700 apartments and will be the tallest residential tower in the southern hemisphere

At a monstrous 336m this will even surpasss the awesome Q1 tower up on the Goldie, which provides another useful clue to how the Sydney of tomorrow will look.

That is, that there will be certain hubs and business districts with Manhattan-style tower block accommodation.

The land value per dwelling in these developments can be very low at just a few percent, the new apartments tend to be very expensive as compared to established stock. Buyers should exercise a good deal of caution.

Instead, property investors and savvy homebuyers often to prefer to look at smaller, established boutique apartment blocks with materially higher land value content (50-60%+), in locations where NIMBYism and planning restrictions such as on the height of buildings will keep new supply permanently restricted to an absolute minimum.