Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James
Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

EXPERT OBSERVER

In the 2018 year, the number of dwelling approvals fell by 5.5 per cent to 210,772. The biggest decline was in Western Australia (down 16.9 per cent).

The biggest lift in approvals was in the ACT (up by 64.3 per cent).

NSW and Victoria dominate the list of regions with both the biggest gains and declines in approvals.

The approvals data has implications for banks, retailers, developers, building and building material companies.

Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

What do the figures show and what does it all mean?

Australia is well past the peak of home building activity in the current cycle. In the year to August 2016, 242,779 approvals were granted by local governments to building new homes – the largest ever total for dwelling approvals in a 12- month period. In previous cycles, annual approval numbers had not passed 200,000 approvals.

In 2018, almost 211,000 approvals were granted to build new homes. This figure is still historically high. So while approvals have retreated from highs, there is still a lot of building being done and will be done over 2019.

The number of homes currently being built across Australia is only just below record highs.

The building cycle tends to start with council approval to build the new dwelling. Finance is secured around the same time. And the actual building phase can take over a year in the case of high-rise apartment Developments or 6-12 months in the case of free-standing homes.

Different trades and businesses are impacted a different points of the business cycle. So knowledge of which regions are expanding at any point in time is important.

Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

As pent-up demand for homes is met, the building cycle will change from new construction to renovation activity. That assumes that people are less inclined to move home when home prices are softening and rather choose to extend or enhance their current home.

The Hills Shire (NSW), the ACT and the Central Coast (NSW) were stand-out regions in 2018 in terms of building activity.

Encouraged by infrastructure Developments, dwelling approvals in the Hills Shire largely doubled in 2018.

The Australian Bureau of Statistics (ABS) classifies around 570 local government areas (LGAs).

CommSec has ranked the LGAs by the number of dwelling approvals in 2018 and then sorted to find those big building regions with the fastest and slowest growth over 2018.

While home building work will remain firm in 2019 in regions like the Hills Shire in NSW, Logan in Queensland and Geelong in Victoria, capital city apartment construction is set to slow. Dwelling approvals in Sydney fell by 60 per cent in 2018 and fell by 37 per cent in Melbourne.

Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

In 2018, there were 73 LGAs in Australia where there wasn’t one approval to build a new home. There were 173 regions with fewer than 10 homes approved for construction. The 30 regions with the largest number of dwelling approvals account for half of all new approvals in Australia. 

The big building regions in 2018 were Blacktown (NSW), Wyndham (Victoria), Brisbane City (Queensland), Port Adelaide-Enfield (South Australia), Swan (Western Australia), Clarence (Tasmania) and Palmerston (Northern Territory). 

What are the implications for interest rates and investors? 

Housing supply has responded to the lift in demand. In other words more homes have been built to meet the increasing demand for accommodation from firm population growth. With more supply or choice, buyers have greater negotiating power over vendors (individual owners and developers).

Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

As a result, there is downward pressure on prices – especially prices that lifted to unsustainable levels in Sydney and Melbourne suburbs when demand was well in excess of supply. 

But interest rates remain low and the job market is healthy and these factors will act as fundamental supports for home prices. As is always the case, housing moves from periods of under-supply to over-supply. Over the coming year new apartment Developments will be completed and some buyers may see the market value of their acquisition is below purchase price.

Buyers, lenders and developers will need to work through this ‘digestion’ process. 

Changing conditions in housing markets are being watched carefully by the Reserve Bank (RBA). Some investors may also need to adjust desired rents in order to attract tenants. First home buyers and budding tenants will be amongst the winners in the softening market conditions. 

Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

The RBA noted in the Statement on Monetary Policy: ..”the number of building approvals has been trending lower for more than a year to be around its lowest level since 2013.

"Information from the Bank’s liaison program also points to a slowing in the earlier stages of residential development over the past year."

"In particular, demand for new, off-the-plan apartments in Sydney and Melbourne has declined, driven by weaker demand from domestic investors and foreign buyers. Greenfield land sales have also fallen over the past year. Many property developers cite tighter access to credit as a dampening factor.” 

Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

In terms of prices & rents the RBA said: “A large supply of new dwellings in some cities has also placed downward pressure on housing price growth and rents. In general, supply has been concentrated in cities where there has been relatively strong population growth, which should continue to support the underlying demand for new dwellings."

"In the rental market, the national vacancy rate is a little below average. This partly reflects the low vacancy rate in Melbourne as population growth continues to absorb the supply of new dwellings.

"In contrast, the vacancy rate in Sydney has risen, particularly in the middle-ring suburbs as new supply has come online; advertised rent inflation has declined. In other capital cities, rental vacancy rates have fallen and advertised rents have generally risen.”

Dwelling approvals in Sydney fell 60 per cent in 2018: CommSec's Craig James

The Reserve Bank recently changed interest rate policy from a tightening bias to a neutral stance.

One reason for the change was the “uncertainty” about how the changing housing conditions will affect consumer spending and employment. 

To date, builders, developers and lenders haven’t reported major issues with defaults or delinquencies from new Developments.

Mirvac recently reported that it settled 1,067 residential lots in the six months to December and was on track to meet the target of 2,500 residential lot settlements in 2018/19.

Mirvac noted “Defaults in the period remained below 2 per cent.” AV Jennings noted a low level of unsold stock and didn’t note any major issues with settlements.

CommSec expects interest rates to be unchanged for the foreseeable future.

CRAIG JAMES is the Chief Economist of CommSec

Tags: 
Commsec Property 2019

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