Approvals down, but not out!

Australia’s housing approvals declined 10.2% over the year-ended May 2020, falling to 171,704 separate approvals. The result was ahead of most expectations, underscoring the sometimes conflicting information in the global economy at this time. Compared to April, approvals of Houses were actually up 1.5% at 9,104 separate approvals.

Still, on an annualised basis, approvals of Houses were down 7.4% over the year-ended May, approvals of Two+ Storey Townhouses were lower by 17.3% and for Four+ Storey Apartment approvals were 13.9% lower. Annual comparative approvals are shown for each of the last five years, in the chart below.

 

Fig. 3

To go straight to the dashboard and take a closer look at the data, click here.

Most pertinent in the comparative chart is that as total approvals have fallen away over the last two years to the end of May, house approvals have remained relatively stable, while Four + Storey apartment approvals have declined quite significantly.

We are fast re-learning what we all really know: Australia is a nation of multiple economies. One way we can see that demonstrated is in the dwelling approvals data for the two most populous states: Victoria and New South Wales. Over the year-ended May, approvals in New South Wales were down 18.5% to 48,387 dwellings, while those in Victoria were down just 0.7% to 60,169. The comparison can be seen in the chart below.


Fig. 4

To go straight to the dashboard and take a closer look at the data, click here.

It could be that there are just timing issues between the states. That is, we can see that New South Wales outbuilt Victoria in the early comparison years, but more recently it has been Victoria’s turn. Its stability over the last year suggests there was a pipeline of work that needed to be built, where it appears the pipeline in New South Wales had slowed.

The following two charts, to round this topic out, show each of those state’s approvals by type over the same five years. The charts seem similar, until we examine the experience with Four + Storey apartments (the light-brown columns). In NSW, they have come from being close to the majority of the supply in some years, to fall back sharply in the last two years. Apartments were never the same deal in Victoria, a function of regularity considerations, as well as land availability and dwelling prices.

A multi-speed housing economy indeed.

Fig. 5

To go straight to the dashboard and take a closer look at the data, click here.

 

Fig. 6

To go straight to the dashboard and take a closer look at the data, click here.

While that is of interest, most attention is focussed however, on the next set of dwelling approvals’ data. The June series will not be available for two to three weeks yet, but there is guidance that housing – especially ‘houses’ – might be on track for a continuation of soft, but satisfactory results.

Anecdotal information suggests the Government’s Home Maker stimulus program is having an impact with the earliest indicator of new home sales from the HIA indicating that sales for June have increased by a significant 77.6%. Sales are really the start of the pipeline so one would expect this to flow through to approvals, and then starts, over coming months.

Many in the sector are concerned about what seems likely to be a very lumpy pipeline for at least the next six months, and probably for longer. Patchy approvals are not only a problem of insufficient work for the ever-hungry building supply chain. When the work is lumpy, it is more difficult for the supply-chain to scale up and scale down as the demand shifts occur.

The risks in that case include that rather than be captured by the vagaries of an uncertain building cycle, some participants in the housing market turn their attention from new builds to churning existing dwellings. That could be fuelled, as Michael Janda pointed out on the ABC Online on 1st July, by declining prices for existing homes.

Referencing the June house price data from CoreLogic, Janda shows that prices declined 0.8%in June, compared with May, despite being up 7.8% over the full FY2020. Capital city prices were hit hardest (-0.8%), with Melbourne and Perth recording falls of 1.1%. Each of those is a large monthly decline.

Smaller capital cities recorded increases, as the graphic below shows.

Fig. 7

Another risk arising from patchiness in the housing pipeline, is ensuring that supply lines are adequate to deal with the changing situation of demand, but do not become an over-burden for businesses already under observable pressures.

Speaking to Janda, CoreLogic pointed to ‘headwinds’ that are likely to place pressure on the housing market for the foreseeable future. CoreLogic’s Eliza Owen told Janda the headwinds include sustained rates of high unemployment, a cash rate that is unlikely to go lower and the prospect of tapering of fiscal stimulus.

Almost 400,000 people are on ‘mortgage holidays’ at the moment. When they taper off, arrears and distressed sales will rise, placing further downwards pressure on prices.

Meantime, it is demand from first home buyers that is kicking the market along, if anyone is at all. Pent up demand is very important to the housing pipeline right now, which is why stimulus has been directed towards getting work done that just needed a push along.

But as Janda again points out, this time through the agency of AMP Capital, the decline in net overseas migration (by around 210,000 people) over the next two years, will put a huge dent in future demand. Matthew Cranston picked up this theme in the Australian Financial Review on 18th June 2020, reporting the BIS Oxford Economics forecast that the decline in net overseas migration would result in about 80,000 fewer houses being needed.

As a result, whatever demand is pulled forward into the pipeline now, is not likely to be replaced in the next few years, at least, not as strongly as was previously the case. That is a longer-term challenge for one of the nation’s most important sectors.


 

Posted Date: July 15, 2020

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