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Monday, 18 April 2016

Supply war not won, just continuous

Building boom continues

The value of residential building work done on new dwellings increased further in the December 2015 quarter to be up by an impressive 11.1 per cent over the calendar year, though as I looked at in more detail here the record high number of dwelling starts has now passed through.

Tasmania has seen a belated surge in building work done, while New South Wales has led the way in terms of non-residential building, particularly in the form of commercial and public sector buildings (including aged care and health premises, offices, retail, and transport buildings), industrial premises (factories, warehouses), and lately entertainment and recreation buildings.

This is tremendous news for the Sydney economy. However, there can be no doubting the epicentre of the Australian building boom - it is Melbourne.

Victoria's building boom has been predominantly driven the by the residential sector - houses, apartments, and major renovation activity - tearing through $19 billion of residential building in 2015 alone, some 40 per cent of which related to new attached dwellings, being units, townhouses, and apartments.

Although approvals and other indicators suggest that residential building work done will move beyond its peak at some point in the not too distant future, the reality is that the industry is still operating at somewhere close to it full capacity.

There is a record $71.5 billion of building work still in the pipeline, including an all-time high building pipeline in New South Wales, Victoria, Queensland, South Australia, and the Australian Capital Territory.

As at December 2015 about 35 per cent of the building work in the pipeline relates to non-residential projects, and a record $46.6 billion of the pipeline related to residential building. On this evidence it would be fair to say that residential building will still be going like the clappers for quite some time to come.

Completions slowed

In the internet age the sight of any cranes at all on the horizon leads to instantaneous predictions of oversupply, and so with such a volume of building underway it can be no surprise that it's near universally received knowledge that Australia will have far too many apartments.

And yet rental vacancy rates in Melbourne have fallen to half decade lows, and in inner Sydney the rental vacancy rate has tightened to just 1.3 per cent, with many inner suburbs apparently experiencing chronically tight rental supply and rents rising.

How so?  One reason could be the unprecedented surge of international student arrivals, which has facilitated a rebound in population growth, almost by stealth. Another is that population growth is demonstrably centralising, and become ever more capital city focussed.

Another contributory factor is that high density projects on brownfield sites requiring site remediation generally take considerably longer to reach completion than detached housing on shovel-ready greenfield land, up to several years in some cases. Indeed attached dwelling completions have declined across each of the past three quarters as detached house completions have increased.

While Victoria and Queensland have notched record attached dwelling completions, in New South Wales the headline numbers have dropped below 22,000 for the calendar year.

The apartment supply pipeline

Attached dwelling commencements hit record highs in 2015, but apparently peaked in the July to September quarter, before a sharp pullback after APRA's regulatory intervention.

In Sydney the number of attached dwellings commenced has to some extent come at the expense of detached housing, and given the rate of population growth it's perhaps not all that surprising that rental vacancy rates failed to rise after accounting for stock obsolescence, demolitions, and the best part of a decade of weak supply.

Heck it was only ten months ago that the Reserve Bank was warning of a Sydney supply shortage.

In Melbourne, vacancy rates have decreased sharply since the middle of 2014 from 2.7 per cent to just 1.9 per cent despite construction records being broken all over the show. Melbourne has edged out Sydney to record the highest absolute population growth in the country, which accounts for part of that dynamic.

Pretty vacant?

Given that the latest data from the Foreign Investment Review Board (FIRB) confirmed that Melbourne is also the city which has attracted by far the greatest interest from foreign buyers  - overwhelmingly from mainland China - it is hard to escape the conclusion that to some extent foreign owners are not bringing their new apartments to the rental market.

A sceptic would say that if sustained this new apartment "export industry" could be akin to something straight from the pages of Orwell. The supply war is not meant to be won, it is meant to be continuous.