Pete Wargent blogspot

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

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Friday, 4 September 2015

Building approvals rebound again

Another new high for approvals

Low interest rates have had the desired effect and have sparked Australia's greatest ever building approvals boom.

Total Building Approvals rebounded by a seasonally adjusted +4.2 per cent in July to 19,298 to be an impresssive +13.4 per cent higher over the year, driven exclusively by the attached dwellings sector (+25.2 per cent).

This data took annual approvals to a new record high of more than 224,000, comprised of approximately 116,000 detached houses and a record high 108,000 attached dwellings (being units and apartments).

Despite this impressive set of figures, detached house approvals have evidently already peaked for this cycle, while the unit and apartment approvals data for the past four months of approvals data suggests that the attached dwellings sector is likely also at or close to its cyclical peak.

This month the result was propped up by an unusual spike in public sector financed approvals - almost certainly a one-off affair - and another lumpy month for Sydney and Melbourne unit approvals.

The total value residential building jobs came in at the third highest level on record in July at $5.9 billion, sending the rolling annual total flying to comfortably its highest ever level at $66 billion.

The respective economies of the four most populous capital cities in particular have benefited from the associated job creation and multiplier effect.

Of course, approvals are one thing, but whether or not the industry has the capacity to construct well over 200,000 dwellings per annum in a cost-effective manner is quite another.

It has already become apparent that shortages in materials (e.g. bricks) and tradies (e.g. project managers, bricklayers) are causing significant building price inflation, particularly in Sydney.

Capital city house approvals

Detached housing approvals have continued to pick up in Sydney from a very low base, but are now trending down in Perth and Adelaide. The net effect is that total detached house approvals have hit a plateau.

Capital city house approvals

Moving on to make some sense of the more volatile attached dwellings data, unit approvals in Brisbane now appear to be following DA's in declining back to more realistic levels having dropped back by more than 50 per cent in the month of July following record approvals in June.

The Sydney and Melbourne markets have repeatedly defied market commentators since 2013 with both house and apartment prices continuing to rise apace, and the logical result has been a resurgent unti and apartment approvals boom.

Sydney median unit prices were tracking at around $450,000 at around the time of the financial crisis - effectively at or below marginal replacement cost - and as such there was very little incentive for developers to build.

With median unit prices in Sydney having blasted around 50 per cent higher to beyond $650,000 and financing costs having been slashed again and again, this is evidently no longer the case, and the harbour city is busily mounting a worthy supply response.

Rolling annual unit approvals in Sydney have moved to well beyond 30,000 for the first time at 30,921, while in Melbourne annual approvals have hit a blistering all-time high of 33,800.

This should keep construction activity at or close to its capacity for the next couple of years, and in time will dampen apartment rental growth in Sydney, Melbourne and Brisbane.

High rise in oversupply

If there was one sector of the market that I will definitely mark down to "underperform" it is the high rise unit sector, with approvals being wafted through in astonishing volumes.

In Queensland the 12mMA of 4+ storey unit approvals has exploded to more than 1,100, a previously unthinkably high level.

Although the figure appears to have topped out for now, I've heard of several rumours and proposals to see further towers built in Brisbane, adding yet further to the looming oversupply of this property type.

It's not a dissimlar story in New South Wales, where the 12mMA of 4+ storey approvals is approaching double the levels seen at the previous cyclical peak, now close to touching 2,100.

Sydney looks set to construct a reasonably impressive volume of units through this cycle, but with the stock of appropriate development sites in the inner- and middle-ring suburbs becoming ever further depleted the next cycle may be a different story.

Despite elevated auction volumes and a renewed burst in apartment approvals, SQM Research reported today that Sydney listings have declined by 3.8 per cent over the past year to below 22,000, while median asking prices continued to rise in August for both houses (+1.2 per cent) and units (+0.7 per cent).  

Whether or not the Sydney market can now reverse the seasonal decline in auction clearance rates will be an interesting one to watch, albeit from the sidelines.