Low interest rates have had their intended effect on the housing market and have ensured that Australia will undergo its greatest ever residential construction boom.
The ABS released its Building Approvals figures for the month of May 2015 yesterday, which revealed another huge result with a total of 19,414 dwelling units approved.
This was the third highest ever print, and only the fourth occasion upon which more units than houses were approved.
The past five months have accounted for all three of the most substantial monthly results on this survey, sending rolling annual approvals to comfortably their highest ever level at 218,442.
Rolling annual house approvals have now moved beyond their peak at 115,686, but unit approvals continue to surge to record highs having doubled over the past half decade.
Whether or not the industry can actually construct this volume of dwellings without pushing material inflationary pressures onto labour costs and particularly building materials is as yet unclear.
However, these figures do ensure that the industry will be operating at or close to its full capacity for quite some to come.
Typically multi-unit developments can take a considerably longer period of time to reach completion and therefore the impact of the approvals seen through YTD 2015 should persist over the next couple of years.
Let’s look at the data in three short parts.
Part 1 – Houses
At the capital city level Melbourne has been the uncontested king of detached housing construction over the past decade, but house approvals have now peaked for this cycle on a rolling annual basis.
Part 2 – Units and apartments
Sydney has now approved more than 28,000 units on a rolling annual basis, with rising prices and interest rate cuts gifting the approvals and construction cycle a clear second wind.
With a population growth tracking at around 85,000, Greater Sydney needs these units to be constructed.
Rolling annual unit approvals continue to track at elevated levels in Brisbane at 15,301, although we do know that Brisbane DAs halved in the March quarter, so approvals will therefore likely calm in due course (refer here for further analysis of Brisbane’s apartment approvals market).
Melbourne has a different dynamic entirely, with the Mexicans seemingly waving anything and everything through for approval.
Rolling annual unit and apartment approvals in Melbourne are closing in on 33,000…and rising!
More remarkably, over the past four months of data more than 13,100 approvals have been pumped through, an annualised pace of more than 39,000, which is a fairly remarkable statistic.
Interestingly the type of properties being approved has changed beyond all recognition in recent times.
Most notably, more than 7,300 dwellings of four or more stories were approved in May, which is unprecedented in Australia.
This chart is obviously a fair warning signal – investors and homebuyers clearly need to know what they are buying and why.
Part 3 – The economy
As anticipated by the central bank, total value of residential building jobs approved has boomed in response to easier policy to roar beyond $65 billion over the past year.
Major renovations are also now beginning to contribute just a little to the economy, albeit mainly stemming from the Sydney boom.
It is especially important to recognise the role that attached dwellings are playing in this building boom.
With high land remediation costs building units can be a more labour-intensive exercise than people seem to think, and considerably more challenging than plonking generic turnkey homes on greenfield fringe sites.
The Lend Lease Barangaroo project has been a classic case in point – with proposed conditions ranging from new ferry terminals, to city footbridges, and now new train stations – there are few easy wins for developers in prime locations.
There are also high environmental rating and safety hurdles to be cleared in concert with seemingly endless other challenges, and these factors are clearly reflected in the moderate gross and operating margins of the listed developer sector.
At just a few per cent of total GDP, residential construction alone certainly cannot cure all ills, but the associated multiplier effect will provide a welcome boost to the economies of Melbourne, Sydney and Brisbane respectively.
At a hefty 78 per cent of the total, well over three quarters of dwelling approvals in May were accounted for by the capital cities.
We might therefore expect to see regional employment struggling when compared to capital cities – and the Detailed Labour Force figures have shown precisely this dynamic to be taking place, with regional Australia creating very few jobs.