Strong housing market fuels dwelling construction: Tim Lawless

Strong housing market fuels dwelling construction: Tim Lawless
Tim LawlessDecember 7, 2020

The Reserve Bank’s monetary policy settings are working.  Dwelling values are rising, as should be expected when mortgage rates are at historic lows. 

But arguably what is more important is that the renewed level of housing market confidence is showing up in improved development activity and demand for new homes. This is exactly what the doctor ordered – a ramp up in the construction sector is one of the essential elements of our new look economy where resources related investment will be lower but housing investment is expected to be higher.

Dwelling approvals have been trending higher since about April 2012 which is close to the same time that the housing market bottomed out from a value depreciation perspective.  Between April last year and August this year the number of dwelling approvals (seasonally adjusted) from the private sector has increased by close to 30% and over the past twelve months dwelling approvals are 10.3% higher for detached homes and 3.2% higher for multi-unit dwellings.

National private sector dwelling approvals

The lift in development activity has a significant multiplier effect on the economy.  For a start, more homes being built means more hours worked in the construction sector and more jobs.  Demand for building materials rises as well as home furnishings, bulky goods, appliances and white goods.

The improvement in dwelling approvals is likely to be driven by a number of factors.  The overall market growth cycle will have a lot to do with it; developers and builders are more inclined to release new supply when consumer demand for housing is higher (transaction numbers were about 22% higher than a year ago based on our estimates for July). 

Another factor would be government grants and stamp duty concession which are firmly aimed at providing incentives to purchase new homes rather than established ones.  And finally there is also the strong rate of population growth which is fuelling organic demand for new housing (Australia’s population grew by 1.8% over the year to March 2013 which equates to just under 400,000 new residents).

The surging demand for new homes shows up clearly in the ABS housing finance commitments data.  The graph below plots the number of new mortgage commitments by owner occupiers for newly built homes.  Finance demand for new housing hasn’t been this high since 1979 and the number of commitments in July this year were 52% higher than a year ago.

Number of housing fin commitments for new homes (oo only)

Dwelling approvals from state to state are a bit of a mixed bag though.  The New South Wales region is the driving force behind the surge in dwelling approvals with the latest August data showing a 48% lift in private sector approvals compared August 2012.  In July, New South Wales accounted for 28% of all private sector dwelling approvals nationally.

NSW private sector dwelling approvals

Dwelling approvals have eased in Victoria after a surge of development approval activity in 2009/10.   In fact, at their height, Victorian dwelling approvals accounted for 40% of all approvals nationally. 

Based on the July 2013 data, Victoria now comprises a much healthier 27% of all dwelling approvals nationally and the lower rate of dwelling approvals together with Victoria’s very high rate of population growth should help to bring reduce fears of local oversupply.

VIC private sector dwelling approvals

With Queensland’s housing market remaining fairly depressed (Brisbane values have only moved 1.1% higher over the past twelve months), developer confidence is yet to pick up.  Private sector dwelling approvals have increased by 10% over the past year but remain well below the long term average. 

Despite the low number of approvals, population growth into Queensland remains rapid, with the state population growing by 92,300 residents over the year to March – roughly the same raw figures as New South Wales but with about a third less new housing supply coming on line.

Qld private sector dwelling approvals

South Australia’s housing market has remained one of the weakest across the capital cities, with dwelling values 0.8% lower over the past twelve months.  With such sedate housing market conditions it is surprising to see dwelling approvals rise by 30% over the past twelve months.  76% of South Australian dwelling approvals are for detached homes, highlighting the fact that the local unit market in Adelaide remains a very small proportion of the dwelling mix despite the state government offering attractive incentives to purchase new inner city units.

SA private sector dwelling approvals

Dwelling approvals in Western Australia have increased by 18% over the past twelve months in line with very robust housing market conditions. The rate of capital gain across Perth has recently been slowing, as has rental growth and buyer numbers appear to have peaked as well, so it may be the case that developer activity starts to mellow across WA as well.

WA private sector dwelling approvals

One final point on the new level of dwelling approvals is the trend towards more medium and high density product.  The graph below shows the number of dwelling approvals for detached homes nationally as a proportion of all dwelling approvals.  Houses now comprise around 60% of all dwelling approvals, a big shift from 10years ago where they accounted for closer to 70% of all dwelling approvals.

The trend towards unit development is likely being driven by changing market preferences (more empty nesters and single person households), affordability constraints (units tend to be cheaper) and changed zoning rules (more land is zoned for medium and high density development particularly in areas closer to the city centre).

National houses as a pc of all dwelling approvals


Tim Lawless is national research director of RP Data.


Tim Lawless

Tim Lawless is national research director of CoreLogic RP Data.

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