Has developer confidence taken a hit as dwelling commencements sag?

Building Activity data for September 2016 was released earlier today by the Bureau of Statistics.  While this is not one of the major economic releases each quarter, it does include a lot of really important data relating to housing construction.  Therefore, it is important to unpack the release and have a look at what the data is showing.

Dwelling commencements

Over the September 2016 quarter there 55,070 dwellings commenced which was -2.8% lower than over the previous quarter and -4.0% lower year-on-year.  The number of dwellings commenced has now fallen for three out of the past four quarters.  Over the quarter there were 29,634 new houses commenced and 25,202 new units commenced.  New house commencements were -1.8% lower over the quarter while new units were -0.7% lower.  House commencements are only marginally lower than their recent peak while falls over the past two quarters have taken unit commencements -21.6% lower than their recent historic peak.  Based on the past two quarters and the fact that recent approvals data has showed a substantial drop in unit approvals we can probably expect further softening of unit commencements over the coming quarters.

Dwelling completions

There were 51,016 dwelling completions over the September 2016 quarter.  Of these 51,016 completions, 27,773 were new houses and 22,666 were new units.  New house completions fell by
-10.3% over the quarter while new unit completions were -8.8% lower.  After completions reached a record-high over the June 2016 quarter, they have eased back over the September quarter.  As the next set of data will show, there is still a substantial volume of dwellings under construction which will ensure that completions remain strong over the coming quarters.

Dwellings under construction

At the end of the September 2016 quarter there were a record-high number of dwellings under construction.  At the end of the quarter there were 221,156 dwellings under construction across the country.  To put this into perspective, more dwellings are currently under construction than the record-high 201,739 dwellings completed over the 12 months to September 2016.  Units which have typically take longer to build than houses are driving the escalation in dwellings under construction.  At the end of the quarter there were 65,729 new houses under construction, 152,568 units under construction and 2,859 non-new dwellings under construction.  As the above chart shows, the number of new units under construction is at near-record high levels and substantially higher than historic averages.  This will ensure that dwelling completions remain high over the coming quarters.

Dwellings approved but not yet commenced

There were 43,291 dwellings approved for construction, ready to be built, which had not yet commenced construction at the end of the September 2016 quarter.  This is a record-high for approvals not yet commenced.  The 43,291 figure consists of 9,292 new houses and 33,298 new units.  The data suggests that most houses approved are being built with the number of houses approved but not commenced continuing to drift lower.  On the other hand, the number of units approved but not yet commenced continues to climb and has reached a new record-high over the quarter.

Conclusions

The most recent dwelling approvals data for October and November 2016 showed a substantial retraction in unit approvals.  The building activity data provides some insight as to why this may have occurred.  A near record-high level of units under construction and a record high pipeline of approved but not commenced units suggests that developer’s confidence to commence some of these unit projects has probably weakened.  It could also point to the fact that presales targets are not being met by developers with lenders seeking a higher proportion of pre-commitment before funds are released for construction. This is further highlighted by the recent falls in the number of dwelling commencements.  Furthermore, housing value data shows a growing disparity between growth in house and unit values in many capital cities.  We suspect that the fall away in approvals is linked to a level of exhaustion of demand for new units in certain areas, concerns about value on settlement (as opposed to purchase prices) and a looming oversupply in certain areas.  The substantial pipeline of stock under construction means that there will still be plenty of completions over the coming quarters but it seems that fewer new projects will be making it to commencement.

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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