Dwelling approvals rise in February but continue to trend lower

The Australian Bureau of Statistics (ABS) released building approvals data for February 2016 yesterday.  Over the month there were 18,252 dwellings approved for construction which represents a 3.1% increase in approvals.  Although approvals increased over the month, they continue to trend lower after peaking in March of last year.  In fact, dwelling approvals in February 2016 were -12.1% lower than their March 2015 peak.

Chart 1

In February 2016 there were 9,288 houses and 8,963 units approved for construction nationally.  Interestingly it was the fourth consecutive month in which there has been more houses approved for construction than units.  House approvals fell by -1.0% over the month to be -5.6% lower year-on-year.  Meanwhile, the more volatile unit sector saw approvals increase by 7.7% over the month however, they were -12.3% lower year-on-year.  Following a monthly peak in unit approvals of 11,158 in March 2015, unit approvals are -19.7% lower than their peak.  Meanwhile house approvals most recently peaked at 10,677 in April 2015 and are currently -13.0% lower than this peak.

Chart 2

The high-rise unit approvals sector has been a key driver of the lift in overall dwelling approvals over recent years.  High-rise units are defined by the ABS as those in blocks of four storeys or more.  In February 2016 there were 3,798 high-rise approvals and although this is well above the long-term average it was the lowest number of monthly high-rise approvals since September 2014.  In fact, high-rise approvals peaked at 8,137 in May of last year and February 2016 approvals were -53% lower than this peak.

Chart 3

Turning the focus to the combined capital cities, there were 13,076 dwelling approvals in February 2016 of which 5,990 were for houses and 7,086 were for units.  Over the month, the number of house approvals increased by 36.0% and unit approvals rose 21.2%.  Despite the monthly increase in approvals, both house and unit approvals were lower year-on-year down -5.0% and -13.9% respectively.    Unlike the national figures, where house and unit approvals have been approximately equivalent over recent years, across the capital cities unit approvals have generally outnumbered house approvals over recent years.  This highlights the magnitude of unit construction taking place, most of which is occurring in infill locations within the major capital cities.

Chart 4

Chart 5

The number of house approvals has begun to trend lower across each of the capital cities.  Perth in particular has seen a sharp slowdown in approvals recently however, it is still approving a similar number of houses to Sydney, a city which has a population more than double that of Perth.  This is reflective of both the limited supply of new houses approved for construction in Sydney and the significant supply of new homes in Perth.

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Unit markets are also generally starting to see approvals fall however, unit approvals remain higher than house approvals in each of: Sydney, Melbourne, Brisbane, Darwin and Canberra.  Of course, most of these units being approved have been high-rise which have a much longer construction period.  Given this some of these units will not come up for settlement for a number of years.  Because of the size of some of these projects presales will also be important.  It will be interesting to see what proportion of units approved for construction secure enough presales to commence construction.  Of further interest is how well these units hold value when they come to settlement given that so many units are being built and we are already hearing of instances where new unit settlements are coming in below contract value.

The data clearly indicates that after hitting record highs early last year, approvals are trending lower.  This must be put in perspective though; on a historic basis we continue to see an extremely high number of dwellings approved for construction and the types of dwellings being constructed has also shifted.  As a proportion we are seeing fewer houses approved for construction and higher levels of high density new unit projects, mostly within inner-city infill locations.  While the economic benefit of heightened high-rise unit approvals should continue for some time, it also carries certain economic risks as these units come up for settlement.  There are already concerns of a glut of units in certain inner city areas.  Many units have been built targeted at the investment market and this segment of borrowers have recently seen much tighter lending criteria.  Furthermore, rental markets are currently experiencing their weakest conditions in more than two decades.  Many purchasers of off-the-plan units anticipate some value growth during the time it takes to construct and will rely on rental income to cover a proportion of their mortgage once the unit is built.  We are already seeing the rate of unit value growth slowing in major capital cities and the weakest rental markets on record which doesn’t necessarily bode well for those purchasers that are still to settle on new units over the coming years.

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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