Earlier this week the Australian Bureau of Statistics (ABS) published building approvals data for January 2016.
The monthly data release provides valuable insight into just how many new dwellings are being approved for construction.
Based on today’s data release there were 17,446 houses and units approved for construction in January 2015.
Dwelling approvals are now -15.1% lower than their record-high which was recorded at 20,646 approvals in March of last year.
Over the month, dwelling approvals fell by -7.5% while year-on-year approvals are -15.5% lower.
The above chart shows that dwelling approvals are clearly now trending lower however, in a historic context they remain at extremely high levels.
The decline in overall dwelling approvals is very much being led by units.
Unit approvals tend to be more volatile due to their somewhat lumpy nature however, they are clearly now trending lower.
In fact, over four of the first six months of last year there were more units approved for construction than houses.
Over the past seven months there have been more unit approvals than house approvals only twice.
While dwelling approvals are -15.5% lower than their record highs, unit approvals are -27.4% lower.
While unit approvals have recently hit record highs and could never remain at those levels, house approvals have been fairly steady, albeit they are lower than previous peak levels.
In January 2016 there were 9,407 houses and 8,038 units approved for construction nationally.
House approvals were -6.1% lower over the month while unit approvals were -9.1% lower.
Year-on-year house approvals have fallen by -4.0% compared to a significant -25.8% fall in unit approvals.
It is clear that approvals are now moving lower and over recent years, housing construction has been a key contributor to economic growth.
As housing construction slows we will need to find other sources of growth.
The somewhat good news is that many of these units approved are high-rise so the economic benefit of these approvals will carry on for some time yet due to the longer construction time for high rise unit projects.
The above chart shows that high-rise units (categorised as those 4 storeys or larger) have overtaken townhouses as the preferred type of unit construction.
After hitting record highs during last year the proportion of high-rise unit approvals is starting to fall however, it remains much higher than approvals for townhouses or low-rise units.
Subsequently these properties will take much longer to construct than low-rise or townhouse product because they are taller, larger and generally include many more individual properties.
High-rise unit approvals have boomed over recent years obviously due to a shift in the types of property purchasers want.
Other factors such as a focus of inner city residential development and the cost of acquiring development sites has also driven the change.
Given the cost of sites many developers (who obviously look to maximise profit) have to build taller residential towers to increase their profits.
This also has led to concerns of oversupplies of new units, particularly in areas of Sydney, Melbourne and Brisbane.
Unfortunately data on the number of approvals that are high-rise isn’t available at the capital city level however, it is published across the states and territories and obviously this is a good proxy for the capital city.
The above chart shows the annual proportion of total dwelling approvals that are high-rise units across New South Wales, Victoria and Queensland.
As the chart shows, high-rise unit approvals have risen substantially across all three states since 2011.
In each of these states the proportion of high-rise unit approvals has recently hit record highs and are now starting to ease.
Over the coming years we will have a record number of new units coming up for settlement.
There is a growing concern around settlement as to whether the valuations for these properties will come in at contract price.
The reason for the concern lies with the fact that some selling prices are set on the assumption of a certain level of value growth between purchase and settlement.
Secondly, we have never seen so many of these types of properties up for settlement, if some people are forced to sell at lower prices it can impact the value of all owners.
Dwelling approvals are starting to fall and in particular unit approvals are trending much lower.
The high volume of high-rise approvals means that there will continue to be stimulus from the high level of dwelling approvals for some time yet.
The high level of high-rise approvals also poses some market risks especially as a record-high number of units, predominantly in inner-city areas of Sydney, Melbourne and Brisbane, come up for settlement over the coming years.
The risk will be heightened, particularly if the rate of home value growth continues to slow as we are forecasting along with the persistent weaker capital growth performance of units relative to houses.