Approvals data shows supply responding to low interest rates and buyer demand

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

The headline data showed that there were 17,062 total dwelling approvals in October 2014.  Total dwelling approvals increased by 11.4% over the month and were 2.5% higher year on year. 

Although there was quite a strong rebound in monthly approvals, they remain -3.7% lower than their recent monthly peak of 17,721 approvals in January 2014.

The large increase in dwelling approvals over the month was driven by the much more volatile unit approvals. 

In October, there were 9,478 houses and 7,584 units approved for construction.  House approvals were -0.3% lower over the month while unit approvals were 30.4% higher.  year on year, house approval have increased by 12.2% while unit approvals have fallen by -7.4%. 

As the second chart shows, the six month trend indicates a slowing of dwelling approval numbers.  The slowing trend in approvals is much more apparent for units whereas house approvals appear to have reached a plateau. 

It is also important to remember that a multi-unit development of units is more risky than developing a single house and ultimately less likely to ultimately be constructed.

Looking at dwelling approvals across the combined capital cities, there were 14,635 approvals in October which was an all-time high. 

Capital city dwelling approvals have increased by 18.5% over the month and are 4.5% higher year on year.  You only have to visit any of the major capital cities to see that there has been a significant surge in construction activity of new homes over recent years. 

The approvals data indicates that the dwelling construction pipeline in these regions is continuing to grow.

One factor that sets apart the capital city market from the national market is the much greater prevalence of unit approvals.  In fact, over the past two years there have generally been more capital city units approved each month than houses. 

In October, there were 7,139 capital city houses and 7,496 capital city units approved for construction.  The 7,139 house approvals were the highest number of approvals over any month since November 1999. 

Monthly unit approvals were at their highest level since October 2013.  Over the month, capital city house approvals increased by 6.8% while unit approvals rose 32.4%.  Year on year, house approvals were up 15.7% while unit approvals are -4.3% lower.

Looking at dwelling approvals across the major capital cities, you can see that approvals are higher than they were a year ago in most cities. 

Dwelling approvals were lower in October 2014 than they were in October 13 in Sydney (-1.6%), Darwin (-42.3%) and Canberra (-43.9%).  Across the remaining capitals, the year on year increase in approvals has been recorded at: 5.3% in Melbourne, 5.6% in Brisbane, 16.3% in Adelaide, 23.4% in Perth and 66.1% in Hobart. 

In Melbourne and Perth dwelling approvals currently sit at near record highs.

House approvals are trending higher across each of the major capital cities.  Although the trend is towards more house approvals year on year approvals are now lower in Adelaide (-17.3%) and Darwin (-1.6%). 

Across the remaining cities, the year on year increase in house approvals have been recorded at: 28.3% in Sydney, 23.8% in Melbourne, 28.4% in Brisbane, 4.5% in Perth, 26.3% in Hobart and 3.8% in Canberra.

Across the major capital cities, the above chart shows that nowadays a much greater number (and subsequently proportion) of units are being approved for construction. 

It is interesting to note that unit approvals are trending sharply lower in Sydney lately while elsewhere they continue to trend higher.  Also note that for most of the past six years Melbourne has been approving a greater number of units than Sydney. 

As mentioned earlier, the unit data tends to be much more volatile than the house approvals data and is reflected in the year on year change in approvals to October 2014.  Over the period, the change in approvals across the cities have been recorded at: -15.3% in Sydney, -6.1% in Melbourne, -8.3% in Brisbane, +84.4% in Adelaide, +117.8% in Perth, +520% in Hobart, -52.6% in Darwin and -58.4% in Canberra.

If we look over the past 12 months, half of all capital city dwelling approvals were for houses.  In fact, the result is only really driven down by the fact that in Adelaide, Perth and Hobart so few units relative to houses have been approved.  In each of the remaining capitals more than 50% of approvals have been for units. 

Units have historically been less likely to ultimately reach completion than houses.  Given the high number of unit approvals over the past two years and the fact that home value growth is now slowing, you do wonder just how many of these units that are approved will actually be constructed in the current cycle.

Dwelling approvals remain at a very high level and with the rate of population growth slowing, it is encouraging to see that supply has responded on the back of low interest rates and some rises in buyer demand and home values. As the rate of value growth slows along with sales activity, it will be interesting to see how much of this stock which is approved will commence and ultimately make it to completion. 

Furthermore, we know that much of the unit stock which is now so prevalent in inner city areas is being purchased by investors.  With capital growth slowing and rental growth slow, this may also impact on some of the future construction of these approved units. 

The Reserve Bank has also flagged that they, along with banking regulators, are looking to curb higher risk lending to investors. 

We don’t yet know what these curbs may be but once implemented they may act as a further deterrent to investors and put into jeopardy some of these inner city unit approvals coming to fruition.