Approvals remain elevated

Melbourne leads approvals

It's a massive week of news, so let's quickly summarise building approvals.

High demand for apartments in Melbourne continues, while Sydney unit approvals continue to retrace.

Note that Brisbane attached approvals have now levelled out, another indicator that the bottom of the market is now nearly in (the crowd is always a day late, and often years late - but we'll now see more townhouses & duplexes and fewer high-rise apartments being approved now). 

House approvals were also strong in Melbourne, while Perth's detached housing also appears to be very close to the bottom of the cycle, with reports of a strong lift in rental demand by REA Group. 

Piecing it together, in seasonally adjusted terms this was a very strong month for approvals at close to 20,000 dwellings, though in truth January is a quiet month and not too much should be read into one month of numbers.

The trend result suggests that the construction pipeline remains large for 2018, although I note that it has visibly declined for Brisbane apartments from a year or two ago. 

Construction pipeline still at large

There is now a rather better spread of dwelling types, with annual high-rise approvals having pared back to a somewhat more sustainable level. 

And in Hobart approvals are rising in response to rising prices, but the supply response is slower being located away from the mainland (and units take a long time to be delivered in any case).

And finally, the surge in non-residential approvals seems to have run its course for now, but there's enough in the pipeline to keep construction humming through 2018, while wages in the sector recorded solid gains in the business indicators figures for the December quarter. 

In summary, approvals appear to have steadied for now, at a fairly elevated level.

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Dat late-cycle project close-out sale feeling

Last post on the bugle

The Australian Financial Review reported this week on the 228-apartment Belise development up on Brisbane's St. Paul's Terrace in Bowen Hills, which is offering a "buy now or settle in 5 years" plan on its final 20 apartments. 

Thus I thought I'd wander over and take a look (of course, I was up in the Valley anyway to watch a garage rock revival gig, but let's go with it).

Associates in the industry advised that construction of the Belise project was laboured progress at times due to various challenges, but the 'Hand of...actually let's not go there...sculpture' is now firmly erected at the front of number 510.

The myriad of challenges facing Brisbane's new apartment developers at the moment are predominantly  5-fold.

Firstly, foreign investors have almost completely dried up, in response to financing and stamp duty & land tax headwinds.

Secondly, it's become much harder for domestic investors in inner-city apartments to obtain any loan, let alone an interest-only product.

Thirdly, even where buyers can be found there's a risk that the purchase doesn't value up, leading to settlement risk, as well as disgruntled buyers & incumbent owners.

Fourthly, a glut of completions has led to soaring vacancy rates, making it tough for investors to secure tenants. 

And fifthly, there is so much construction underway in inner-city Brisbane right now that prospective buyers have had to deal with heavy earthworks noise from an adjoining block.

A quick scan through the term sheet shows that buyers with at least a $60,000 cash deposit are invited to make bids against somewhat ambitious sticker prices, essentially badged as a call option 5-year settlement plan.

Music when the lights go out...

I thought I'd subject the Belise project to Wargent's world-famous but alas-yet-to-be-trademarked 'lights on test'.

You can be the judge of the results.

Rollback of restrictions underway

In related news, the Reserve Bank of Australia (RBA) released its financial aggregates figures this week, which showed credit growth pertaining to investors is sinking to its lowest level on record at just +3 per cent over the year to January 2018. 

The growth in lending to owner-occupiers accelerated to +8 per cent, so overall housing credit is still flowing relatively freely.

Figures released separately by APRA showed that none of the major lenders is anywhere close to the arbitrary 10 per cent growth cap in respect of investment loan exposures, with only Westpac pushing for market share lately. 

However, these figures relate to the year to January 2018, and this week a rollback of investor and interest-loan restrictions very quietly got underway, with one of the major banks reportedly now offering 90 per cent LVR interest-only lending again (while there are second-tier options taking buyers all the way up to 95 per cent LVR).

However, the serviceability restrictions will remain in place, so only those with strong enough incomes need apply. 

Meanwhile, APRA's Wayne Byres noted that the 10 per cent cap on the growth in investment loans was 'reaching the end of its useful life'.

Comments from the Treasurer Scott Morrison also hinted that investors may find the regulatory foot removed from their throats as this year rolls on.

That said, expect the regulators to keep the flow of interest-only loans capped at 30 per cent in 2018 and beyond. 

Finally, and since you were no doubt wondering, the Valley gig was excellent! 

Private investment stutters

CapEx stumbles

A disappointing result to round out the final quarter of calendar year 2017, with total new private capital expenditure declining by -0.2 per cent in seasonally adjusted terms to $29.6 billion.

The mining sector has flattered to deceive a little, with capex falling further to sit at $9 billion for the quarter

For the same quarter half a decade ago the amount was $24.3 billion - it's been quite some cycle!

Investment in other industries, mainly services, continued to lift to $18.1 billion, to be about +10 per cent higher than a year earlier. 

Hopes of a more robust recovery are pinned on this trend continuing, and there was a lift in expected new expenditure for 2018-19 from the same estimate a year earlier, albeit a modest one. 

At the state level the drag continues to come from Western Australia, where annual capex has dropped from $64 billion in 2012 to $27.9 billion in 2017. Phew.

Based on these numbers the bottom for WA is still not in, and possibly by quite some margin.

Most of the other states and territories are performing solidly enough.

With the Inpex construction phase now all but complete it appears reasonable to expect that expenditure in the Northern Territory will soon decline from its presently elevated level. 

The wrap

The sort of data release from which you can choose your own narrative, with capital investment rising modestly to be +4 per cent higher than a year earlier.

However, it's hard to get enthused by the first estimate of total capex for 2018-19, especially when the actual quarterly capex was only flat this time around. 

'But look at the green shoots!' as Norman Lamont would've said.