Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

'Huge fan of your work. Very impressive!' - Scott Pape, The Barefoot Investor, Australia's #1 bestseller.

'Must-read, must-follow, one of the finest analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Business Insider.

'I've been investing 40 years yet still learn new concepts from Pete; one of the finest young commentators' - Michael Yardney, Amazon #1 bestseller.

'The most knowledgeable person on Aussie real estate - loads of good data & charts...most comprehensive analyst I follow in Oz' - Jonathan Tepper, Variant Perception, 2 x NYT bestseller.

Monday, 4 May 2015

Construction boom to break all manner of records

Record high building approvals

The ABS released its Building Approvals data this morning for the month of March 2015, and it confirmed that Australia's construction boom is full steam ahead, with all manner of records in line to be shattered.

It seems that the theory that land prices were too high to allow a construction recovery were perhaps partly correct, as house approvals are threatening to peak at a shade below 115,000 on a rolling annual basis.

Detached housing construction may also to some extent be stymied by the conspicuously stultified process of capital city land release. 

However, rip-snorting unit and apartment approvals continue to blow up all previously held records.

An all-time monthly record of more than 19,500 dwelling approvals in March sees the rolling annual total approvals figure blasting through 210,000, with an unprecedented 95,000 of those approvals being for units and apartments. 

Lord love a duck, it's only a blinkin' boom...

Whether or not the industry actually has the capacity to construct dwellings at such a pace cannot yet be known, but the approvals are now in place.

Let's take a look in two parts, commencing with...

Part 1 - Construction boom and the economy

The notion that a construction boom led by apartments would be of little use to the economy was flawed, in part since remediation costs and stipulations on brownfield sites are high, often prohibitively so.

The total value of residential building jobs has easily surpassed a new record, at more than $62 billion over the past year. 

And charted below is the evidence that the construction of units and apartments will contribute more than handsomely to GDP growth over the next two years.

If there is a contributor which has failed to live up to expectations, it is the major renovations sector, which has barely lifted at all ex-Sydney.

While total residential building jobs of $62 billion may not sound particularly eye-popping in the context of a mining investment boom which saw annual capital investment punching close to $100 billion at its 2012/13 peak, residential construction does have a notoriously high multiplier.

This shift back to the capital cities is of course adverse news for Australia's resources regions and mining towns, but capital cities are set to thrive from the nascent building boom.

In this context it is small wonder then that Melbourne and Sydney are leading employment growth, with Brisbane and Perth making up a strong proportion of the remainder of job creation on a national basis.

However, the building boom appears set to pass South Australia by, with forecasters expecting a severe downturn in construction activity in due course.

Part 2 - State versus state

Skipping over the mainly dull state level figures to get straight into the more interesting capital city data, we can see that house approvals are looking decidedly peaky.

Greater Melbourne continues to lead the way in detached housing construction and approvals, as it has for the past decade-and-a-half.

This only goes to prove that when it comes to the larger capital cities, it is not only "how many" are built, but also "where and what" which drives dwelling prices. 

Unit approvals have soared to more than 30,000 in Melbourne over the past year, comfortably a record high, while Greater Sydney's housing boom has had a second wind, sending annual unit approvals up close to 27,000. 

Inner Sydney remains tight

Remember these are only approvals and not new dwellings actually built, and this will still not nearly be enough to address the shortfall in Sydney, at least not in the inner suburbs.

In fiscal year 2014 there were fewer than 8000 dwelling approvals within inner ring Sydney suburbs, and vacancy rates remain at 1.5 per cent or lower in most inner suburban locations (ex-inner south).

Rents have risen by "only" around 20 per cent over the past five years for inner Sydney suburban apartments.

Yet with unit prices rising at a fearsome pace and holding costs declining dramatically since 2008, many landlords are motivated only to re-let units without vacancy periods rather than maximising rental returns.

By way of an example my property manager phoned me last month to advise that a tenant employed in the forces has been called up for service and thus had come to the end of his stay at an apartment I own in inner Sydney, where vacancy rates are tracking at just 1.2 per cent, seeing median prices soaring by 23 per cent over the past year alone.

Given the number of itinerants in suburbs close the city - where a good proportion of renters are young professionals, many on 457 employment visas - frictional vacancies will ensure that vacancy rates simply do not fall lower than that.

Within a few days several applications had been received and the property was immediately re-let for the same rental price per week that it has been for at  least half a decade, although clearly a higher dollar figure per week could theoretically have been charged given the evident rental demand in the market.

Unlike fast-moving share markets where rational profiteers should not misprice securities materially on a regular basis, property markets are illiquid, imperfect and lugubrious, and such irrational pricing is commonplace.

I have an article due out next week which will shed a good deal more detail upon the persistent under-supply in Sydney's inner ring, where there are not nearly enough dwellings for sale or for rent to meet massive demand. 

High rise risks

Regular readers will know that I have frequently provided snapshots on this blog on the types of property which will eventually end up in a clear oversupply.

In particular though 2014 I regularly noted that units in 4+ storey apartment blocks have been breaking record high approval rates - for example see this warning shot on Victorian approvals which I fired on January 9:

"Put another way, across the last five years Victoria has approved an extraordinary 62,837 "high rise" (4+ storey) units - well over triple the 18,705 approvals in the preceding five years."

I've updated one of the more interesting graphics from my chart packs below on 4+ storey apartment approvals, and we can clearly see that more if the same is occurring.

They say that imitation is the sincerest form of flattery (or something like that) so it has been just wonderful to see the same charts cropping up all over the media in recent weeks.

Commsec found today that the market is "fundamentally changing" with "apartment approvals in blocks of four storeys or more" hitting record highs.

And then I flicked on the evening ABC News tonight and was delighted to find that research by a beaming Alan Kohler (via ANZ) has also uncovered that 4+ storey apartment approvals are at record highs.

Well, better late than never, I guess.