Pete Wargent blogspot

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

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Thursday, 21 January 2016

Completions & commencements

Building boom

As I looked at here yesterday, Australia's building boom is approaching its cyclical peak. Let's take a high level look in two parts at where and when dwellings are being constructed and completed.

Part 1 - Completions

Over the year to September 190,318 dwellings were completed, thereby ekeing out a new high, and we could even feasibly see that number inch a little higher over the next quarter or two.

A hot topic of discussion right now is apartment oversupply, and indeed at the local level there are several construction hotspots where this playing out, something easily predicted by market participants way back in 2014.

It is worth noting here that in Sydney, at least, the increase in higher density construction has to some extent come at the expense of detached house construction, with house completions in New South Wales still tracking well below historical levels, despite higher absolute Sydney and Melbourne population growth than in decades past. 

Melbourne has continued to blaze the trail in terms of home building.

Victoria (24,313) and New South Wales (23,385) each completed a high volume of apartments in the year to September, which will inevitably lead to softening unit rents in some locations.

There was a slight decline in Queensland apartment completions (15,132) in the year to September, albeit from historically high levels. 

Part 2 - Commencements

Dwelling ommencements also increased to a new high of 55,532 in the third quarter of calednar year 2015 to reach an impressive 213,245 for the year, driven by record high dwelling starts for units, apartments and townhouses. 

Detached housing starts show that - with New South Wales continuing to struggle along - at the national level the cyclical peak is just about in, and some way lower than the levels we have seen at preceding peaks. 

Another 26,044 higher density units and apartments were commenced in the quarter, taking annual starts to a record 98,861, which is just about where forecasts made earlier in 2015 had expected the peak to be. 

Victoria (32,617), New South Wales (32,083) and Queensland (21,472) have all seen historically high levels of unit commencements in the year to September. 

The wrap

Overall, it was another big quarterly and annual result for housing starts and completions, as the cycle approaches its peak.

An annual total of ~213,000 commencements starts now compares very favourably against national annual poulation growth of ~317,000, before accounting for stock obsolescence and demolitions.

Of course, it is important to drill down to the sub-regional and suburban level to achieve more meaningful analysis than can be covered in one blog post. 

There are a few reasons why the flood of apartments might not be quite as dramatic as implied by the headline numbers, the lack of timely available detail on demolitions being one of them. 

Approvals data shows that the current cycle has been wildly skewed towards higher density "high rise" dwellings of four or more storeys, to an unprecedented degree, so you can straight away mark that sector of the market down to "underperform".

Many are one bedroom apartments, and even the two bedroom varieties can be just 60 square metres in size, suggesting in turn that if each individual shoebox unit can accommodate even two heads, that would be a pretty good outcome. 

Anyone who lives near me would probably also nod gravely in agreement that many appear to be kept permanently vacant, perhaps owned by investors from mainland China. 

In Sydney, the supply response follows nearly a decade of under-building, so while there are obvious flashpoints of apartment oversupply (Parramatta, Zetland, etc.), at the Greater Sydney capital city level vacancy rates haven't budged all year, while in many popular suburbs vacancy rates remain under 1.5 per cent.

Another factor to watch, is the huge projected surge of international students into the largest capital cities, discussed in more detail here

That said, as documented on this blog previously, some sub-regions clearly are in the midst of over-building, so it's very much a case of caveat emptor for property investors.