Unit approvals surge, but uncertainty remains over their construction

The Australian Bureau of Statistics (ABS) released building approvals data for June 2014 last week.

National dwelling approvals fell by 5.0% over the month with house approvals falling by -2.6% and unit approvals down -8.4%.  Despite the fall in approvals over the month, a significant number of dwelling approvals remain in the pipeline.  Note that dwelling approvals have now fallen over four of the past five months.

Year on year, dwelling approvals are 16.0% higher in June 2014 than in June 2013. 

House approvals have increased by 12.2% year-on-year while unit approvals have surged by a greater 22.0%. The greater rise in unit approvals compared with house approvals reflects changing lifestyle patterns and greater acceptance of higher density living.  However, a recent analysis we have undertaken indicates units are less likely to be ultimately completed than houses. 

Although the pipeline is strong, it is reasonable to expect that not all of these units will ultimately be constructed.

The month to month dwelling approvals data is quite volatile, given this it is worthwhile looking at the annual number of approvals. 

Over the 12 months to June 2014 there were 108,598 house approvals and 85,067 unit approvals.  With a total of 193,667 dwelling approvals over the year there has been a 20.7% increase in approvals year on year. 

Total annual dwelling approvals are now at their highest level since October 1994.

Focussing on dwelling approvals, across the combined capital city housing markets there were 144,278 approvals over the 2013/14 financial year.  This was an increase of 25.5% over the year and the highest number of annual approvals on record. 

Both Sydney and Perth have also recorded their highest ever number of dwelling approvals over the past year. Over the year there were 69,973 houses approved for construction (+21.3% over the year) and 74,305 unit approvals (+29.8%).

Most individual capital cities have recorded an increase in dwelling approvals over the year with the largest increases recorded in Brisbane (47.1%), Sydney (30.6%), Adelaide (30.4%) and Perth (27.6%).  Darwin was the only city where approvals were lower over the year, down -3.7%. 

Comparatively the annual increase in dwelling approvals has been much lower in Hobart (12.9%), Melbourne (13.9%) and Canberra (22.6%).  Sydney and Melbourne alone have accounted for almost 58% of all capital city dwelling approvals over the year.

As noted earlier, there have been more unit approvals across the combined capital cities than house approvals. 

Over recent years around 98% of house approvals have ended up as completions compared to only 86% of unit approvals.  While units are increasing in popularity there is much less certainty about their ultimate construction than there is for houses. 

Across the cities Sydney had 68.8% of approvals for units and in the remaining cities the figures were: Melbourne (52.9%), Brisbane (56.0%), Adelaide (32.3%), Perth (23.8%), Hobart (11.2%), Darwin (58.7%) and Canberra (61.9%).

Despite the monthly fall, the pipeline of dwellings approved for construction is significant.  It is important to note that over the past five months, dwelling approvals have fallen on four occasions.  This may indicate that the sector has moved through the peak levels of dwelling approvals. 

The strong pipeline of unit approvals, particularly in capital cities, also carries a risk as units are less likely to be ultimately constructed than houses.

Nevertheless, the Reserve Bank stated that with low interest rates they didn’t just want to see higher house prices but also a construction response.  This certainly seems to be how the current conditions are playing out and with population growth recently starting to slow we may start to see an improvement in the alignment between home construction and population growth.