Encouraging rebound in dwelling approvals, but how many will end up being constructed?

Not long before the Australian Bureau of Statistics (ABS) released building approvals data for May 2014, the Reserve Bank Governor (RBA) Glenn Stevens completed a presentation in Hobart.

Within that presentation Glenn Stevens stated: “It would in my opinion be good, for a range of reasons, if it did persist for a while. If the next couple of years saw an unremarkable performance on prices, and construction staying at the higher levels that will clearly be reached over the coming year, it would be an outcome that would contribute to a balanced growth path for the economy and to housing more people at manageable cost.”

This was made in the knowledge that home values rose by 10.1% over the 20-13/14 financial year and following three consecutive monthly falls in dwelling approvals between February and April 2014.  Luckily the May data which was released last week showed a 9.9% rise over the month.  Dwelling approvals are now 14.3% higher year on year.

After three consecutive monthly falls in dwelling approvals it was looking as if the much vaunted rebound in housing construction was running out of puff (approval is the initial step before construction can commence).

Of course, we don’t want to get too carried away with a one month bounce but it was encouraging to see that the fall in dwelling approvals has, at least for the moment, not continued. Total dwelling approvals in May were 14.3% higher than a year ago with house approvals 14.0% higher and unit approvals 14.5% higher.

The data is inherently volatile on a month to month basis so I like to also note the annual number of dwelling approvals. Over the 12 months to May 2014, there were 191,088 total dwelling approvals, 107,291 of which were for houses and 83,799 which were for units. 

The annual number of dwelling approvals is at their highest level since there were 192,614 dwelling approvals over the 12 months to December 1994.  Let’s not understate this, the rebound in dwelling approvals is strong and much needed after years of ongoing insufficient supply additions. 

The challenge from here will be what proportion of these approvals actually end up moving to construction and then ultimately completion.

Focussing on the capital cities, it is encouraging that there has been a significant rise in dwelling approvals across these areas where supply issues are generally most dire. 

On a rolling annual basis, there were 141,845 capital city dwelling approvals over the 12 months to May 2014.  Of these approvals, 68,455 were for houses while 73,390 were for units.  Note that at a national level dwelling approvals for houses still outnumber units however units outnumber houses in the capital cities highlighting the direction that new development is heading in most of our capital cities.

The annual number of capital city house approvals as at May 2014 was 19.6% higher than over the corresponding 12 month period in 2013. Capital city house approvals are at their highest level since the 12 months to February 2011 when 69,524 houses were approved.  

Capital city unit approvals are 23.4% higher than they were a year earlier and are only slightly lower than their record high level of 73,835 unit approvals over the 12 months to March 2014.

Across individual capital cities the annual number of dwelling approvals is higher across each city except for Darwin. The greatest annual lift in dwelling approvals has been recorded in Brisbane and Sydney. Anyone that has visited either of these cities recently would have seen plenty of residential construction taking place and it seems that there is a significant additional pipeline of residential construction to come.

As you can see from the above chart, across each of the major capital cities there has been an upswing in dwelling approvals.  The most significant upswing has occurred in Sydney and Brisbane however, the number of approvals remains much higher in Sydney and Melbourne than in all other cities. 

The number of dwellings approved for construction is at an all-time high currently in Perth, is very close to its record high in Sydney and at its highest level since the 12 months to June 2004 in Brisbane.

We mentioned earlier about the shift towards unit approvals as opposed to house approvals which is much more prominent in capital cities than nationwide. 

The above chart highlights the proportion of dwelling approvals which are for units as opposed to houses over time.  As already noted over the 12 months to May 2014, 51.7% of all capital city dwelling approvals were for units.  In Sydney (69.4%), Melbourne (52.4%), Brisbane (57.2%), Darwin (58.6%) and Canberra (62.9%) a majority of approvals are for units rather than houses. 

In the remaining three cities 31.1% of approvals are for units in Adelaide, 23.9% in Perth and 13.6% in Hobart. I have little doubt that particularly in Perth we will see a growing proportion of approvals for units rather than houses over the coming years.

The May dwelling approvals data showed an encouraging rebound following three consecutive monthly falls.  Keep in mind that Glenn Stevens wants to see higher construction levels over the next few years and that will be the real challenge. 

If consumer sentiment continues to languish and if and when home value growth slows there will be much less certainty around the viability of new residential developments.  Maintaining high levels of new residential approvals (and construction) over the next few years will be no easy feat.