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

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Thursday, 14 July 2016

Making Sense of Australia's Super-Duper Construction Boom

Record commencements

Australia's construction boom hit "peak apartments" in the March 2016 quarter the latest Building Activity data from the ABS showed, with developers now beginning to crunch their way through the record number of dwellings approved but not yet commenced. 

Total quarterly commencements accordingly rose to a record high of 59,684.

Attached dwelling commencements - townhouses, units, and apartments - were up by 21 per cent from the first quarter of calendar year 2015, leading to just shy of 230,000 dwellings commenced in the year to March 2016, also a record.

As you can see in the chart above, annual house commencements have already passed their peak for this cycle, with Sydney in particular constructing fewer detached dwellings through the cycle as the harbour city becomes more dense - building up, not out - while on the other hand Melbourne continues its heroic sprawl.  

Annual attached dwelling commencements are now at their highest ever level.

Completions slower to come online

The curious aspect of this cycle is that with so many of the commencements being multi-unit developments, the supply has been considerably slower to come online.

Why? Because on average it's much faster to build a house on a shovel-ready block of greenfield land (perhaps only a few months) than it is to deliver a block of apartments on a brownfield site, which could chew up a period of several years from approval to completion.

The outcome of this is an epic supply bottleneck.


There are now more dwellings stuck in the "under construction" phase than we have ever witnessed before: a thunderous total of 218,262 dwellings, more than 150,000 of which are attached dwellings.

If you can see a lot of cranes on the city horizon, this is why!

A record 74,530 of the dwelling units under construction are located in New South Wales (including more than 56,000 attached dwellings), 67,748 are in Victoria (nearly 48,000 of which are attached dwellings), and 39,816 are in Queensland (more than 31,000 of which are attached dwellings, an eye-popping ratio).

In other words, lots and lots of apartment projects are underway but not yet finished.

Indeed, completions have been so slow to come online that actual dwelling completions have declined for the past four quarters on the bounce, from 49,733 in the first quarter of last calendar year to just 45,619 in the first quarter of this year.

This huge lag between record approvals and completion helps to explain why super-strong population growth in the two most populous capital cities has to date continued to outpace and absorb dwelling supply. 

Annual attached dwelling completions in NSW (22,400) and VIC (23,000) not only remain below previous peaks, but are also tracking way behind the romping pace of state population growth of 106,000 and 109,000 per annum respectively.

The Australian recently reported an estimated year's oversupply of dwelling based upon an assumption of 47,000 net additions to the dwelling stock per quarter. 

Yet reported vacancy rates in Sydney and Melbourne - even if the figures are arguably incomplete - have actually declined, the slowdown in rental price growth as much reflective of the number of investors in the market through this cycle as the number of physical dwellings.

Because the record high volume of units and apartments under construction are slower to come online than houses, the assumptions reported by The Australian have been over-egged when compared to the number of actual completions by some 85,000 dwellings. 

Moreover these assumptions overlook that up to 25,000 commencements per annum simply replace existing stock, as pointed out by the good Prof. Philips of the ANU.

The picture is complicated somewhat further by the addition of granny flats which are not well captured by the data, but after accounting for demolitions the new supply has so far had a relatively muted impact in Sydney and Melbourne.

What has transpired to date is localised bursts of oversupply, not nothing too dramatic at the macro level.

The wrap

There are more than 150,000 units, townhouses, and apartments now under construction in Australia, easily the highest figure on record, so construction activity will remain at or close to full capacity for some time yet. 

Attached dwellings can take a long period of time to complete, so to date at least the impact of new supply hasn't been all that great. 

But what is Australia going to do with all these new high-rise dwellings during a period when its post mining-boom economy isn't supporting such high levels of immigration? 

Mr. Turnbull does have a plan. And like most of Australia's cunning plans these days, it involves tapping demand from China

It's only been a fortnight since the new "streamlined" student visa rules kicked in, but early anecdotal indications suggest that the plan might just be working.