The great hope as the Australian economy transitions away from mining investment is a pick-up in housing construction which is happening but don’t expect it to be all smooth sailing.
The Australian Bureau of Statistics (ABS) released Building Activity data which showed that the recent boom in dwelling approvals is resulting in rising dwelling commencements.
Dwelling commencements over the first quarter of 2014 were 8.7% higher than the previous quarter and 22.2% higher over the year. In fact the 48,964 dwelling commencements over the March 2014 quarter was the highest on record.
As we have seen via the monthly building approvals data there has been a significant lift in housing construction activity over the past 2 years or so.
The good news is that there is a very strong correlation between dwelling approvals and dwelling commencements as highlighted in the first chart.
As we are seeing more approvals, it is rapidly flowing through to commencement activity. This has the added benefits of spending throughout the economy for materials and labour.
For houses we can see that there has been a noticeable rise in both approvals and commencements recently. At the end of the March 2014 quarter, house approvals rose by 8.4% over the quarter and house commencements were up 12.8%.
Over the past 12 months the increase across both approvals and units has been almost equivalent at 21.4% for approvals and 22.6% for commencements. You would expect this very close correlation as the risk associated with developing a single house is much lower than a multi-story unit complex.
If we look at the quarterly unit approvals and quarterly unit commencements data, again there has historically been a strong correlation between the two.
Over the most recent quarter, unit approvals fell by -6.9% compared to a 4.2% increase in unit commencements. Compared to 12 months ago, unit approvals are 35.4% higher whereas unit commencements have increased by 27.1%.
Unit approvals are at near record high levels (despite the fall over the most recent quarter) while unit commencements were at their highest level ever over the March 2014 quarter. With record high levels of dwelling approvals it is difficult to see how they will all end up making it to ultimately being completed.
As mentioned earlier, the construction of a single house is much less risky than construction of a multi-unit dwelling. Within the multi-unit sector, a level of presales is typically needed before construction commences and then myriad financing issues can arise as construction progresses.
There are many examples of high profile unit developments where earthworks commenced however the actual structural construction never progressed or was substantially delayed.
The final chart shows house and unit approvals versus house and unit commencements. As you’d expect they are correlated although there is a natural lag.
What is interesting though is that while house completions often end up reaching or at least getting very close to the previous peaks in house approvals, the same can’t be said for units.
It’s often the case that we will see a spike in unit approvals and at some later date there will be a spike in unit completions but it is much lower than the peak than the approvals peak.
This would tend to suggest that units which get approved for construction often make it to commencement (see Chart 3) but are more likely than houses to ultimately not be completed.
With the number of unit approvals at record highs the challenge will be ensuring that they ultimately end up being completed. History suggests that units are much less likely to make it to completion than less risky houses.
Over the 10 years to March 2014, there have been 1,043,641 house approvals and 575,672 unit approvals. Over the same period there have been 1,021,410 house completions and 493,944 unit completions.
As mentioned early there is likely to be some lag however, 98% of houses approved have been completed compared to 86% of units approved. Once again, this indicates unit approvals are much less likely to ultimately be built compared to house approvals.
Of course developers obviously feel that there are new unprecedented levels of demand for units. The signs are there that the housing sector can at least help in transitioning the economy away from mining investment but with a greater proportion of units being approved for construction; don’t bank on all those approvals ultimately ending up as completions.