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 Hmmm...one of the world's most popular & widely-read financial publications.

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

Wednesday, 15 October 2014

New home building hits 20 year high

The ABS released its Building Activity data for the June 2014 quarter today. Let's take a look at what it revealed in four short parts...

Part 1 - The Aussie economy

Firstly, a smattering of good news for the economy, with the total value of building work done having increased by 6 percent over the past year driven largely by an 11 percent uplift in the value of residential building with more in the pipeline.

Nice.

In Chain Volume Measures terms, however, the Q2 result showed only a moderate increase in building activity, the building boom being largely driven by attached multi-unit dwellings.

Meh.

Although new residential building work continued to increase, as I have noted here many times previously major renovations work in the only two cities which really matter has been in a decade-long "secular downtrend" and has continued to declined by another 3 percent over the past year.

This generational dearth of "alterations and additions", as it is so termed in ABS vernacular, offset an annoying portion of the gains in new residential building work and shall continue to shave irritating fractions from Australia's GDP.

After all, us high-earning Gen X'ers all live in swanky city apartments near the city centres and the Gen Ys that aren't investors or priced out of the market completely all bought new stock with their first home-buyer grants.

In short, nobody under the age of 40 owns anything worth renovating...masses of equity or not mate!

Meanwhile, while non-residential work has hit a plateau (kindly click on the charts to expand them):


At the state level the big winners from the building boom have been the New South Wales and Victorian economies respectively, with both residential and non-residential activity booming in Sydney in particular since 2012.

Also note here how with dwelling prices appreciating by ~5 percent, good old South Australia is finally just starting to build a few houses as we will explore in a little more detail below.

This is good news for the struggling state economy and heartening to see, particularly as Adelaide's manufacturing base is being slowly yet surely flushed around the U-bend of history.


Part 2 - Dwelling commencements at a national level

The quarterly data on housing starts revealed two key things. 

i) firstly, on a rolling annual basis there were more than 179,000 dwelling commencements which represents a 20 year high for home building activity, an outcome which only one year ago was sneered at and widely considered to be impossible. That's quite a feat! However...

ii) secondly, it is also clear that there was a significant drop in the number of apartments commenced in the June 2014 quarter, falling back from 20,661 to 17,561, so the impact of the uplift in dwelling prices may now be receding in aggregate.

The number of houses commenced in the quarter remains 15 percent higher than in the preceding year. Accordingly, is the commencements chart for houses and units:


On a rolling annual basis the total number of apartments commenced now (just) sits at the highest level ever recorded, but that trend is now set to roll over as implied by the quarterly data above:


Part 3 - Commencements by state

As usual the data revealed significant variances by state. 

I've detailed here many times previously why despite appearances and commonly held consensus a significant city-wide over-supply of dwellings will not eventuate any time soon in Sydney. 

Summarily, the experienced major domestic developers know which side their bread is buttered and will now pull back from further projects of any great significance in the harbour city.

Sure enough, today's release confirmed my expectations with New South Wales commencements dropping all the way back from 12,401 to 10,874, a trend which will continue as evidenced further by my analysis of building approvals data:


Victoria continues to commence the construction of thousands upon thousands of houses suggesting a widespread oversupply risk. 

The Melbourne and regional Victorian markets may well be vulnerable to a significant price correction in time, and with an unprecedented 1800 auctions scheduled for Cox Plate weekend, I'd suggest bravely that a Melbourne market reversal may now be imminent. Why? Well, more sellers than buyers!

Note that South Australia is finally now coming to the party by getting a few housing starts under its belt. Not before time, one might well add!


While I believe that the apartment commencements data can be generally best viewed on a rolling annual basis I think it's also important this quarter to run the below chart to underscore a key point. 

And that point is that while at times most of Sydney feels as though it is under construction implying a possible oversupply of apartments, much of the building activity is commercial in nature (for example, Barangaroo's row of gargantuan towers mostly comprise only commercial office space - now that will result in an oversupply!)

The looming oversupply of Sydney apartments will largely be confined to the CBD itself (with a few new Chinese funded developments to dominate the city skyline), the inner south and the previously industrial suburbs surrounding the airport, and a few of the rezoned "Urban Activation Precincts" (UAPs) which are clustered around transport hubs.

As noted here previously the major Aussie developers are nobody's fools and are aiming to have most of their Sydney apartment stock well and truly off their books by the December 2015 financial reporting period, by which time the Sydney building boom will have long since tapered off.

Sure enough the number of apartment commencements in New South Wales has plummeted over the past six months of data from 7494 in the December 2013 quarter to only 4807 starts in the June 2014 quarter. In other words, the the risk of Sydney oversupply is already evaporating exactly as we anticipated.


The rolling annual apartment commencement chart below implies to me that apartment oversupply risk will remain in play in inner Melbourne and inner Brisbane, while the Sydney unit supply in the pipeline is now set to roll over.


Part 4 - Completions

Finally, completions, which are arguably even more important than commencements. Victoria continues to deliver waaay more houses than any other state, as it has for years now.


And the same is evident in Victoria for units and apartments as you can see in the chart below. 

To conclude here on the Sydney oversupply risk issue, New South Wales has seen 36,644 completions over the past year, implying enough new stock for around 90,000 extra heads. 

Note that this is not nearly enough new supply even to meet the colossal explosion in the state's population of more than 114,000 persons in the last 12 months of data, let alone address almost an entire decade of chronic undersupply and the twin related issues of demolition and stock obsolescence.


This point mirrors the Housing Industry Association's (HIA) lament that although new residential building activity has hit a 20 year high, supply restrictions and administrative delays are beginning to bite. 

And while the residential building boom is indeed welcomed it will still fall short of the HIA's desired target of 186,000 new dwellings per annum, and in truth, it won't add nearly enough to Australia's GDP to halt the slowing of the economy either as mining construction dives over the two years ahead (a neat analysis on the respective importance of the two sectors I provided here).

By the way...

It just occurred to me that I have been providing this level of analysis absolutely free now every single day without fail for four years (OK, maybe I missed one or two when on flights to London).

And that's without the annoying infestation of 21st century crap that are Google Adverts or pop-up pay-per-click excreta, and without shooting off a single spam email imploring folk to buy rubbish they don't need.

In this day and age, that must surely be something unusual indeed, so do please feel free to share this article for me...cheers 'til tomorrow!!

PW