We must be careful new dwellings don't create inner city oversupplies: Cameron Kusher

We must be careful new dwellings don't create inner city oversupplies: Cameron Kusher
We must be careful new dwellings don't create inner city oversupplies: Cameron Kusher

Earlier this week, the Australian Bureau of Statistics released building approvals data for January 2015.

The data showed that over the month, dwelling approvals surged to an all-time high while the annual number of approvals is also at a record high.
Chart 1
Across the nation, the seasonally adjusted data showed that in January 2015, there were 19,282 dwelling approvals. This was a record high number of monthly approvals, 4.9% higher than the previous peak of 18,389 approvals two months earlier.

The number of dwelling approvals increased by 7.9% over the month and approvals are 9.1% higher year on year. On an annualised basis, we are also seeing a record high with 203,182 approvals, up 0.8% over the month and 10.8% year on year. This represents a strong pipeline of new dwellings to be constructed.
Chart 2
Looking more closely at the national figures, it shows that the surge in approvals over the month was entirely due to unit approvals as opposed to house approvals. We also saw a rare occurrence whereby there were more units approved for construction than houses.

The above chart highlights monthly approvals with the thicker lines showing the six month average number of approvals. Over the month there were 9,588 house approvals and 9,694 unit approvals. The monthly number of house approvals has been fairly flat for the past 11 months while unit approvals tend to be much more volatile but trending higher.

In January 2015, house approvals fell -0.4% while unit approvals increased by 17.5%. Year on year to January 2015, house approvals have fallen by -2.9% while unit approvals were 24.3% higher.
Chart 3
Turning the focus to the capital cities it is firstly important to note that unlike the national data the figures are not seasonally adjusted.

In January 2014 there were 11,926 capital city dwelling approvals which was -14.1% lower over the month but 8.6% higher year on year. Over the past 12 months, there has been a record high 153,323 dwelling approvals across the combined capital cities.
Chart 4
Once again looking at houses as opposed to units, the data shows that the unit market is the key driver of new housing approvals.

In January 2015 there were 4,986 capital city house approvals and 6,940 unit approvals. Approvals for both houses (-11.2%) and units (-16.0%) were lower over the month which can largely be attributed to seasonal effect of a weaker January.

The unit series tends to be more volatile however, house approvals were at their lowest level since December 2013 over the month.

The chart also shows that unit approvals have generally been outnumbering house approvals since the middle of 2012 (despite some volatility month-to-month). Year-on-year, capital city house approvals are -5.9% lower while unit approvals are 22.1% higher.
Chart 5
Looking at the individual capital cities and utilising annual data to smooth out some of the volatility, it is clear that there has been a surge in approvals over the past few years across the major regions of Australia.

First looking at house approvals, over the 12 months to January there were 13,337 approvals in Sydney, 22,198 in Melbourne, 10,574 in Brisbane, 5,879 in Adelaide, 20,001 in Perth, 886 in Hobart, 789 in Darwin and 1,621 in Canberra.

Year on year, the number of house approvals have changed by 18.1% in Sydney, 16.2% in Melbourne, 34.2% in Brisbane, 8.2% in Adelaide, 12.1% in Perth, 59.1% in Hobart, 7.5% in Darwin and -1.0% in Canberra.

Probably the most interesting point to note from the data is that both Melbourne and Perth approved more houses than Sydney, despite Sydney’s larger overall population.
Chart 6
Turning the focus to the unit market, over the past year the number approvals across the cities have been recorded at: 25,440 in Sydney, 26,712 in Melbourne, 12,012 in Brisbane, 3,241 in Adelaide, 7,432 in Perth, 95 in Hobart, 1,016 in Darwin and 2,090 in Canberra. Only Adelaide, Perth and Hobart have approved more houses than units over the year.

The annual change in unit approvals across the cities are recorded at: 0.7% in Sydney, 22.8% in Melbourne, 7.6% in Brisbane, 17.8% in Adelaide, 38.0% in Perth, -48.4% in Hobart, -15.4% in Darwin and -38.9% in Canberra.

The supply-side response has generally been quite positive over recent years however, in Sydney, where the dwelling deficiency is greatest, has experienced a much smaller increase in new supply than across other cities. The Perth, Darwin and Canberra housing markets have weakened noticeably over the past year with value growth slowing and rental rates falling.

New dwelling approvals have eased in Darwin and Canberra however, Perth continues to approve a increasingly larger number of dwellings for construction despite the softening housing market conditions in this city.

Approvals have surged by a greater amount for units as opposed to houses over the past several years. If we look at how this is now playing out we find some interesting trends:

  • Investors tend to target unit stock rather than detached houses (in particular units in the inner city) and this is where a large amount of unit stock already exists and a high proportion of the new stock is being delivered.

  • In Melbourne and Brisbane, where the rise in prominence of unit approvals has been greatest over recent years, unit values have recorded an annual increase of 2.8% and 0.5% compared to 8.0% and 6.5% for houses.

  • Turning to the rental markets, capital city house rents have increased by 1.6% over the past year which is lower than the 2.3% increase in unit rents however, in Melbourne and Brisbane annual growth in rents has been lower for units than houses.

The annual rental growth figures for units are 2.2% in Melbourne and 0.5% in Brisbane compared to 2.5% and 2.0% respectively for houses. Keeping in mind that many of these recent unit approvals will take time to be built, it could be the case that value and rental growth for Melbourne and Brisbane units will be minimal due to the higher supply levels coming on line. This may also have an impact for the wider market as the overall composition of unit stock increases it may result in lower overall value growth.

Other cities should be cautious of higher housing stock levels, particularly within the inner city apartment markets. With population growth slowing, particularly from overseas, and a surge in new construction, without careful management an under-supply of dwellings can quite quickly turn to a glut in particular areas if too many new homes are approved.

Brisbane at least appears to have slowed its rate of approvals growth recently however, it is potentially concerning that Melbourne has seen no such easing of the throttle.

More dwellings are required nationally however, developers and those approving these new homes need to carefully monitor just how many new homes are required at one point in time.

The RBA has pointed out that they want to extend this period of increased construction for as long as possible. Extending this heightened period of construction will help support jobs, particularly as high rise construction takes much longer than house construction, and will help reduce the housing deficiency. But we must be cautious to ensure that we aren’t just creating oversupplies in inner city areas while maintaining deficiencies in other areas of our cities where cheap and affordable housing options are required.

Cameron Kusher

Cameron Kusher

Cameron Kusher is senior research analyst at CoreLogic RP Data.

Cameron Kusher


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