A shaky start for new housing supply in 2010

Dwelling approvals data released on the 2nd day of March by the Australian Bureau of Statistics was a stark reminder that the amount of new housing approved for construction remains well out of kilter with Australia’s rapid rate of population growth.   The total number of approvals fell by 7 percent on a seasonally adjusted basis in January, dragged down by ongoing weakness in the apartments sector.  The good news is that approvals are now almost 50 percent higher than when they bottomed in January last year.

Total dwelling approvals over time

Apartment approvals have suffered much worse than approvals for detached housing where they actually improved slightly over the month.  In fact, detached housing approvals have been trending upwards quite consistently since December 2008 when there were 7,503 (seasonally adjusted) house approvals in the month (approvals hadn’t been that low since just before the introduction of GST when the building industry virtually came to a standstill).

Dwelling approvals houses v units

Apartment approvals, on the other hand, fell by just over 19 percent in January.  If we focus just on the private sector it was even worse with apartment approvals down 29 percent.  This is at a time when virtually every significant urban local government is pushing for higher densities and ambitious infill targets in the inner city, the fringing suburbs and along the major transport spines.

We can possibly tie the better performance of house approvals back to difficulties in obtaining finance for unit construction.  Securing finance tends to be easier for house and land developers because the developments are staged over several releases.  Large unit developments, on the other hand, are an all or nothing measure – a developer can’t build and release a unit tower in stages.

Additionally, the banks are generally asking for unit developments to be 100% pre-committed – or even higher to allow for contracts that fall over.

This lack of certainty is likely to be putting some buyers off choosing to buy within a new unit development as the opportunity cost of the development not proceeding can be very high.

The demand for housing can be demonstrated based on population data.  Population growth has never been higher with just over 443,000 new Australians over the year to June 2009.  Based on an average household size of 2.6 persons, that’s demand for about 14,200 new dwellings constructed each month.  Additionally, factoring demolitions and second homes adds a further 23% to the equation (in a speech last year by Deputy Reserve Bank Governor Ric Battellino estimated that 15% of new dwellings constructed are to replace existing homes and a further 8 percent are likely to be second homes – refer to the ‘Are we building enough dwellings’ section of his speech here:  http://www.rba.gov.au/speeches/2009/sp-dg-251109.html).

Dwelling approvals v population growth

That means, as a nation, we need to be building around 17,400 homes every month.  Dwelling approvals haven’t been that high since very briefly back in 2002.  Based on the average number of approvals over the last three months (14,504) we are currently building about 20 percent too few dwelling each month – and of course we have been under building for some time now so the supply gap has grown quite wide.

The repercussions of an ongoing undersupply of homes can be seen in strong growth in housing values which, for property owners is a great thing, but for those struggling to get into the housing market it isn’t that great.  Housing affordability issues are the primary consequence of this imbalance and the social issues that flow from that are even harder to measure.

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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