Pete Wargent blogspot

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

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Friday, 31 July 2015

Approvals now declining

Approvals pull back

As expected Building Approvals declined in June, driven by a sizeable 20.4 per cent drop in the number of units and apartments approved.

On balance this is a good thing, since nearly 103,000 units and apartments have been approved over the past year, which means that this cycle is comfortably at an all-time high on that measure.

Total building approvals rose towards a record 218,000 on a rolling annual basis, but it looks as though the peak will now soon pass.

This tallies with what the Housing Industry Association has forecast, which is a record 215,000 dwelling commencements in 2014/2015, a figure which projected to pull back steadily over the next few years back to around 170,000 by 2017/18.

This data also adds some weight to the notion that while smaller developers might through necessity take a short termist approach to pushing through profitable projects, it is not in the longer term interests of the big players to create a glut of dwellings.

A number of indicators now suggest that the residential construction boom is pulling as hard as it can but can go little further than these historically elevated levels.

The most striking aspect of this cycle has how been economic activity has been so heavily skewed towards the construction of units and apartments, quashing claims that only detached houses can drive higher levels of economic activity.

Much of the economic activity is generated by the land remediation and site preparation on brownfield sites.

The economies of Melbourne, Sydney and Brisbane have respectively received a timely boost from this record level of construction activity and the associated multiplier.

Units, units...

Greater Melbourne continues to build the greatest number of houses.

But let's focus today on where these record number of units are set to be built.

Well, in short, Melbourne again, with annual approvals surpassing 33,000 for the first time ever.

However, we may have seen something of a "pull forward" in Victoria ahead of a new Metropolitan Planning Levy which took effect from July 1, so approvals may well tail back in due course.

Going forward developments of over $1 million in value will be hit with a 0.13 per cent levy on the value of the development.

Total unit approvals in Sydney for the past year rolled back a little to 28,261.

A Sydney unit oversupply?

In some areas such as around Parramatta, for example - where there is very little constraint on new high rise apartment supply - yes. 

Similarly the old urban wastelands of the inner south are busily being overbuilt through this construction cycle (and, to be blunt, these often aren't very attractive areas in which to live either).

But as BIS Shrapnel pointed out this week, Sydney is steadily running out of prime sites for apartment complexes.

And prime location suburbs such as Pyrmont already have "nowhere left" to develop, which portends ongoing capital growth in such developed and land-locked suburbs over the longer term.

We know that DAs fell sharply in Brisbane in the first quarter of 2015, yet for now unit and apartment approvals continue to hum along at record high levels.

Cost inflation

As an interesting aside, it is becoming increasingly questionable whether the industry even has the capacity to build this many apartments in a cost-effective manner.

For example, a massive shortage of tradies in New South Wales - particularly of bricklayers - has sent the cost of dwelling construction soaring skyward over the past six months.

This is a point correctly anticipated in advance by those smart people of the Reserve Bank liaison.

Site preparation costs have skyrocketed by 45 per cent in six months, while electrical trade costs are up by 30 per cent over the same period.

Bricklayers previously being offered $1 per brick are now demanding $1.80 per brick.

In short, we have reached the building cost inflation phase of the construction cycle as tradies and materials are in woefully short supply.

High rise glut

Nothing much new to add here except that prospective property investors need to know exactly what they are purchasing, where they are purchasing, and why.

At the state level Victoria has approved nearly 21,000 high rise units in 12 months, which will result in a glut of this property type.

It's a broadly similar story of four plus storey approvals in Queensland.

Brisbane is likely to the standout market in 2016 for mine, but self-evidently there are a number of "no go" zones, which will become oversupplied with new high density apartment developments.

Hopefully readers aren't taking unsolicited advice from a free blog page, but make sure you carry out detailed research into forthcoming dwelling supply at the suburb and regional level before you even think about buying anything.


Went to see Rubber Soul Revolver yesterday at QPAC and was totally blown away by the music.

Try to catch the tour as it now moves around Australia.

Check out the tour details here.