The recent Building Approvals data shows that Australia has approved a record number of dwellings over the past 12 months.
The dwelling investment cycle tends to be one of the most sensitive sectors to movements in interest rates since both residential projects and property purchases tend to be heavily reliant upon financing.
The data implies that detached house building approvals have already peaked for this cycle at around 112,000 on a rolling annual basis, largely due to a lack of shovel-ready land.
Sydney and south-east Queensland in particular are suffering from a dearth of appropriate greenfield land supply being made available for sale, with fewer than 3 months worth of supply now estimated.
In Sydney’s case, the greenfield land supply available for sale has effectively hit zero.
However, unit approvals are now at record highs.
Unsurprisingly property market commentary has almost overnight flip-flopped from “we aren’t building enough properties, there will be a recession” to “we are building too many properties, there will be a crash”.
In the main, however, the market is just doing its thing and responding to rising prices, although the data does suggest that in certain pockets of inner city Melbourne there will eventuate a significant oversupply of apartments.
In particular, there is likely to be a greater supply of high rise units than rental demand.
Despite this there is scant compelling evidence to suggest that the construction of up to 30,000 units per annum is likely to have a dramatic impact upon the wider Melbourne property market, with a city population of above 4 million and rising rapidly.
SOMP on dwelling investment cycle
The latest Statement on Monetary Policy (SOMP) from the Reserve Bank made some telling points on the dwelling investment cycle and allayed some fears about the potential overbuilding of apartment stock.
Firstly, it has been noted that multi-unit approvals can take several years from the point of being approved to completion, meaning that new supply can be significantly slower to respond than that of detached housing.
Indeed, a significant proportion of unit approvals never make it through to completion at all, and for that reason actual dwelling commencements are a far superior indicator of forthcoming supply.
Secondly, in Sydney’s case, the Reserve Bank’s liaison found that almost all appropriate sites in Sydney have been exhausted making a farce of the notion that Sydney will end up with “too many dwellings” given the harbour city’s rampant population growth projections.
Noted the Reserve Bank:
“Liaison contacts have also raised concerns about the availability of land for apartment developments in Sydney, as the stock of suitable sites has been gradually depleted over recent years.”
I first made the point back in 2012 that the Reserve Bank could end up “wearing” a Sydney property boom through this cycle, and to date I haven’t seen too much to change that view.
Indeed the SOMP’s economic outlook even somewhat resignedly suggests that dwelling price growth in Sydney could accelerate due to the shortage of land available for development.
“The risks to the wealth forecast are tilted somewhat to the upside for a number of reasons.
One reason is that supply constraints, particularly in Sydney, may limit the extent to which new dwelling investment can satisfy growing demand, which raises the possibility that housing prices will grow more quickly than forecast.”
A final point on the high level of approvals which is rarely questioned or even acknowledged is whether the residential construction industry even has the capacity to build significantly more than 200,000 dwellings per annum in a cost-effective manner.
To accommodate an increase in demand for new dwelling construction (and for major renovation work) the construction industry must draw heavily on the land made available for development, construction workers, materials and equipment.
The size and pace of the increase in dwelling investment is therefore dependent upon how quickly and efficiently the industry can source the required additional inputs.
Even at this early stage in the construction cycle it is transpiring that there is a shortage of skilled project managers and bricklayers, particularly along the eastern seaboard.
Theoretically, skilled workers could be brought in from overseas, but either way, there is likely to be a cost attached to the skills shortage.
Meanwhile the Reserve Bank’s liaison has picked up upon indicators of inflation in building materials prices, with the rate of inflation in building costs and new dwellings inflation continuing to rise very sharply towards 5 per cent per annum and beyond.
Historically, increases in dwelling investment in previous cycles have put intense pressure on building materials leading to a sharp inflation in the cost of newly built homes.
Dwelling commencements forecast
While the Housing Industry Association (HIA) is a vested industry interest its own forecasts are usually fairly useful and project new dwelling commencements to peak at 205,500 in 2014/15 before tailing away fairly sharply thereafter.
At the state level in the HIA anticipates dwelling commencements to pull back in 2015/16 across the board, but especially so in New South Wales and Victoria.
Construction workers abound
One good piece of news, for the capital cities at least, is that there is unlikely to be a shortage of construction workers available in the industry, with those skills being considered largely transferable from the mining sector.
On the other hand the figures suggest nothing short of an unmitigated disaster for demand in a number of mining towns and their associated property markets, with construction employment in the mining sector set to capitulate by an astonishing 60,000 between 2014 and 2018.
Over the past 12 months alone house prices in Moranbah have crashed by more than 40 per cent, while there has been a great deal of pain in markets such as Newman, Port Hedland, South Hedland Karratha, and many more.
The Reserve Bank forecasts suggest that there must be a number of other resources markets which are set to follow suit.