With interest rates at extremely low level, dwelling construction is starting to fill some of this void with approvals now higher than their long-term average level.
Glenn Stevens, the Governor of the Reserve Bank (RBA) has previously stated that with the lower interest rate environment the RBA wanted to see a pick up in dwelling construction, not just higher home prices.
The hope was that dwelling construction could pick up some of the economic void as mining investment went past its peak. The good news for the RBA is that what they desired is exactly what is coming to fruition.
Lower interest rates and incentives to ‘buy new’ are fuelling a higher number of dwelling approvals, which ultimately leads to construction which in turn provides a substantial multiplier effect for the domestic economy.
The month-to-month dwelling approval data is volatile so it is important to look at the trend and as you can see, approvals are beginning to trend higher. Based on a rolling 12 month average figure, there were 13,589 approvals in August 2013 which was 11.7% higher than in August 2012.
The August 2013 approvals figure of 12,163 was the most recent low. According to the RP Data-Rismark Home Value Index, capital city home values have increased by 8.7% from their recent low. Given this, in percentage terms the rebound in approvals has been stronger than the lift in home values.
Of course, a lift in dwelling approvals is more important than a lift in home values. It would be fair to say a higher rate of dwelling approvals is much more beneficial to the Australian economy than a lift in home values.
Unfortunately without the additional demand created through higher home values and sales it is less likely that developers would take on the risk of building more homes.
If we look at the rolling 12 month average dwelling approvals figure, approvals are now 1.9% above their 20 year average. The issue being that for most of the past 20 years, the supply of new dwellings has been insufficient, so is it actually a good benchmark? Probably not and no doubt the RBA would like to see approvals continue to climb further from this point.
On a state-by-state basis, you can see that there has been a clear response within the market in New South Wales, Queensland, South Australia and Western Australia while Victorian approvals are trending lower.
The number of approvals across Victoria has previously been significantly higher than those in other states and has recently recorded a significant decline. Note that this is not necessarily a bad thing given the fact that the housing supply deficiency is lower in Victoria and there have been concerns about excessive levels of construction within inner Melbourne and across the outer fringe of the Melbourne metro area.
In all of the other major states you can see there has been early signs of a revival in dwelling approvals. The annual number of dwelling approvals as at August 2013 was 22.6% higher in New South Wales, -3.0% lower in Victoria, 12.2% higher in Queensland, 9.6% higher in South Australia and 31.8% higher in Western Australia.
Finally, one of the other important recent trends with regards to dwelling approvals has been the sharp rise in the proportion of approvals that are for medium and high density housing. Over the past 12 months, 41.6% of all approvals were for units. Just five years ago only 33.2% of all approvals were for medium and high density properties.
The shift towards a higher proportion of unit approvals is a change that may be difficult to accept for potential home owners but will no doubt be an ongoing feature of the market over coming years.
Governments are proving to be reluctant to expand urban footprints, particularly within our major capital cities. With populations continuing to increase in these centres there will subsequently be additional demand for housing.
It is clear that instead of supplying a greater number of detached homes there is a general preference, particularly in some of our larger cities, for densification of inner city areas. This is not necessarily a bad thing, especially considering that this development of inner city areas will reduce the requirement for new infrastructure.
Units also tend to be more affordable than detached houses. The major challenge is likely to be that as families grow, units may not suit the needs of these families as well as a detached house with a portion of land does.
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