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With dwelling approvals fall with the levels of approvals to around pre-pandemic levels, is the construction boom over?

key takeaways

Key takeaways

Rising interest rates will slow down new dwelling construction.

Residential building approvals fell in March, driven by volatile apartment approvals, but only partly reversing last month's sharp 42.0% rise.

The number of detached houses under construction in Q4 2021 was almost double the 57.5k seen just prior to the pandemic in Q4 2019.

Apartment approvals fell across most states, though rose in QLD and WA.

The housing sector's sentiments have turned lower, with the question of whether it is a good time to buy a dwelling being at its lowest point since 2008.

Higher fixed rates are likely to bite, reducing borrowing capacity.

It looks like the construction boom is over.

We know the government has been stimulating the construction industry to get us through the Covid pandemic, and in general, it has done a great job and at the same time enabled many first home buyers into the market.

But the latest figures show that building approvals for detached homes decline 3.1% in March.

And this is occurring is the time when we have a severe shortage of houses and when the return of overseas migrants, students and tourists will help support demand for units townhouses and apartments throughout the year.

Dwelling Approvals Monthly

Moving forward, rising interest rates will slow down new dwelling construction but this may take up to 6 months to emerge.

Residential building approvals fell

Residential building approvals fell 18.5% month on month in March, only partly reversing last month’s sharp 42.0% rise.

The fall this month was driven by the volatile apartment series (-29.9% month on month), with detached house approvals falling by less (-3.0% month on month).

Looking through the monthly volatility it is clear building approvals have fallen back from their pandemic highs with the annual year on year at -35.6% and the level of approvals has settled back to around pre-pandemic levels over the past three months.

Apartment Non House Approvals By State

The key question going forward remains the extent that which housing construction was brought forward due to Homebuilder (and by other grants) and whether approvals continue to fall below pre-pandemic levels.

So far the monthly flow of approvals has settled at around pre-pandemic levels, which is still likely to pressure construction capacity given elevated backlogs.

Detached House Construction

Separately released starts and completion data for Q4 2021 revealed there were 101k detached houses under construction, almost double the 57,500 seen just prior to the pandemic in Q4 2019.

By state, detached house approvals fell across most states (NSW -7.5%; VIC -5.0%; SA -2.2%), though rose in QLD (+5.8%) and WA (0.3%).

By dwelling type, the story is more mixed with apartment approvals well below pre-pandemic levels (-31% below February 2020 levels), while detached approvals are still a little above pre-pandemic (+14% above February 2020 levels).

Relative to pre-pandemic levels, detached dwelling approvals are still a little above pre-pandemic in most states, except for VIC where it is back to pre-pandemic levels.

House Approvals By State

Overall the current annual run rate of detached house approvals is running at 119,000 compared to 105,000 in 2019, while for apartments the annual run rate is running at 62,000 compared to 71,000 in 2019.

The housing sector's sentiments have turned lower

Sentiment in the housing sector has turned lower according to the monthly W-MI Consumer Sentiment Index with the question of whether it is a good time to buy a dwelling being at its lowest since 2008.

Time To Buy A And House Price Expectations 05 May

Sydney dwelling prices have now fallen for three consecutive months and it is likely higher fixed rates are starting to bite with fixed rates having increased by 220bps since their low point in April 2021 to be 4.34% according to RBA data.

In a recent NAB Weekly, it is noted that the rise in fixed rates reduces theoretical borrowing capacity by 22% in a simple credit foncier model.

Under NAB’s cash rate assumption and assuming pass through to mortgage rates theoretical borrowing power falls by less, by around 13% by the end of 2024.

An even steeper fall in borrowing capacity would occur under market pricing.

Editor's note: Source of charts, data and some commentary- NAB


About Bryce is a property development specialist, having successfully sourced, project managed and completed hundreds of development projects for Metropole’s clients, helping them create substantial wealth.Visit
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