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Wednesday, 4 February 2015

Record high building approvals in December

Strong building approvals in 2014

The ABS released its Building Approvals data yesterday, which showed that 2014 was as strong a calendar year as have seen for new dwellings approved in Australia.

Notably some 17,124 approvals were recorded on a trend basis in December which is the highest monthly figure ever recorded in Australia.

This record monthly result was spiked by large-scale development approvals in Greater Sydney, with some 3,330 approvals recorded for 4+ storey buildings in New South Wales, the great bulk of them in the state capital.

The most notable facet of the 2014 data has been the structural shift towards attached dwellings from detached housing with more than 85,000 attached dwellings approved in the calendar year, easily the highest level we have ever seen.

Part 1 - Value of jobs approved

The total value of residential building jobs approved recorded another strong month in December taking the rolling annual figure close to $59 billion.

This was a massive 13 percent uplift on the 2013 result and some 28 percent higher than 2012, making 2014 also easily the strongest year on record on this somewhat simple metric.

It is true that the total value of residential approvals only represent a small piece of the economic puzzle.

Meanwhile potential weakness on the non-residential construction side is unlikely to help the equation much, particularly given that the latest engineering construction figures suggest that the looming capex bust looks set to be one for the ages.

On the positive side of the ledger we do know that residential construction has historically proved ot have a particularly strong multiplier effect on local economies, so record high residential building approvals may represent more robust news for the economy than it appears at first blush from the raw data.

Master Builders Australia reported this morning from its National Survey of Building and Construction that hiring intentions in Q4 2014 increased to their highest level in 7 years.

The economies which are set to benefit most from the expected construction multiplier are those of Greater Melbourne and Sydney, although Perth and Brisbane also witnessed a sharp uplift in residential building jobs approved through 2014.

This will at least to some extent  help to offset some of the fallout from the capex cliff which is set to be experienced across many regional areas, particularly in the mining and resources states.

Part 2 - House approvals by capital city

Let's skip the dull state level data today and dive straight to the considerably more interesting capital city level figures.

These show that Melbourne continues to approve the highest number of houses at 22,213 in 2014 continuing the theme of a kahuna half decade of dwelling construction in the Victorian capital.

Sydney is absolutely nowhere by comparison at just 13,374.

Notably Perth is really getting its skates on, approving more than 20,000 houses for construction in 2014 just as net interstate migration slumps to an Australian crawl.

Part 3 - Unit approvals by capital city

This construction cycle is largely a units and apartments story, however.

Monthly approvals figures are inevitably "lumpy" and Sydney gagged on one such lump in December with a king wave surge of 3,679 approvals, taking total unit approvals for 2014 as per the chart below up to 24,878.

New apartments will largely spring from the ground around the so-termed "UAPs", transport hubs and the Central Business District itself - in the inner city, the inner south, Chatswood, Parramatta, Bankstown, Liverpool and Ryde.

The chart below tells its own story - with net interstate migration from Sydney declining to its lowest level on record the harbour city will have few worries with absorbing ~25,000 new units, even if these do all make it to project completion, which may not eventuate.

Following the best part of a decade of under-building, apartment rents have continued to rise in inner ring Sydney.

Brisbane finished the year approving 11,613 units. the greatest calendar year figure for the Queensland capital. 

Significant changes are afoot in the Brisbane housing market which are easily visible to any visitor as discussed on this blog previously. 

Investors in Queensland need to understand these shifts thoroughly before buying property blind, although the long-promised generic price growth in inner Brisbane is now at last expected to play out.

Part 4 - Oversupply

As the above chart shows, Melbourne has been the king of over-building units the over the past few years with a further 26,317 unit approvals squeezed through in 2014.

Of course, it's not so much the number of approvals which is the source of the market imbalance per se, rather it is the mismatch in the type of product being approved for construction.

As recorded by the red line in the chart below, the number of Melbourne units and apartments approved in blocks of four or more storeys has continued to track at unprecedented levels since 2011 with nearly 15,000 further approvals in 2014.

This is way, way higher than historically has been normal suggesting that there is significantly more high-rise stock being bundled through than the rental market demands. 

In short, much of the high-rise dwelling stock is evidently being exported offshore with scant rental demand a secondary consideration. The words "systemic risk" occur to mind. 

Let's take a look in four short parts.

The Wrap

December 2014 was a record month leading to a record year for new building approvals, particularly in the units and apartments sector.

One only needs to witness the marketing of new developments, with brochures presented in English and Chinese, to appreciate how much of this new stock is expected to be sold offshore, particularly to Asia.

From a macroeconomic perspective the residential construction boom will go harder and go for longer than most commentators expected.

However our full chart packs do show that the total value of building construction approved can realistically still only represent a relatively modest share GDP up to perhaps 3.5 percent, even with a kicker from the construction multiplier.

There are some key data releases coming up in the weeks ahead, but futures markets are sceptical as to whether yesterday's interest rate cut will alone do enough for the economy, acknowledging dovish sentiment from Governor Stevens and pricing in a cash rate of well under 2 percent right out until Q3 2016.


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