Defying all predictions: housing approvals lift again

(Please note due to issues with the data dashboard we are not able to provide a direct link to the graphs used in this article. However most of these graphs can be accessed through the FWPA data dashboard).

Remarkable resilience in the domestic housing economy continued in July, with 13,840 separate approvals for the month delivering a 12.0% increase on the prior month. Just as defiant – positively buoyant in fact – approvals were up 6.3% on July 2019. Coupled with new dwelling approvals is the surprising news that in the June quarter, average sales prices for existing dwellings fell a very modest 1.8%.

Every housing sector crystal ball was murky a few months ago when absolutely everybody expected dwelling approvals and property values to slump as the recession became inevitable and the pandemic wrought its grip on the market. Murky might be an under-statement, because many of the key housing indicators continue to point in the opposite direction to the predictions.

Before considering some attributions (made by looking into one of those self-same crystal balls), it is important to examine the actual data.

First, we can look to the national dwelling approvals data to see that for the year-ended July, approvals continued on a consistent pattern with those of the last few months. In normal times, we would say ‘nothing to see here’, but these are anything but normal times.

The table provides some further clues about the shape of the housing market, which over the last year has been in greater symmetry than is usually the case. That is, we normally expect to see sectors other than free-standing houses rise and fall faster than houses, which are less elastic in their demand. Equally, by now in the pandemic, we all expected approvals would have fallen away very sharply.

We need to examine state-based approvals to see how consistent the trend has been around the country. At a very macro level, we can observe some consistency, but look to the larger states and we can see there has been some change over the recent year.

Again, the table shows us much of what we need to know about regional changes in dwelling approvals. The two largest states show the variances with NSW approvals down 13.7% over the year-ended July and those for Victoria up 3.4% over the same period. Queensland is also worthy of comment, because its experience is similar to NSW, while SA and Tasmania are growing in line with Victorian approvals growth.

Not far from the depths of winter, it is hard to imagine that there is significant movement from the warmer north to the southern states, but it does seem that people movements – population growth – has something to do with the latest approvals data.

Below we can see the NSW experience over the last two years. Free-standing house approvals fell by the same amount as the aggregate – almost 14%- while the other big decline was in 4+ Storey Flats, the decline in which was almost 21%.

The general attribution for the decline in NSW housing approvals is a lack of land releases and the uncertainty that has seen apartment building developments curtailed as the housing downturn bit. The former may have been avoidable, but Sydney has challenges releasing land that Melbourne does not. The latter is definitely cyclical and to be expected.

Below we can see how NSW compares with Victoria. Chalk and cheese is one description that might apply, with Victorian house approvals up 1.1% over the year and 4+ Storey Flats experiencing an increase of 17.5%.

Land releases are less challenging in Victoria, there is population movement towards Melbourne and Victoria more generally and affordability is better in Melbourne. That accounts for most of the differences, but cycles do not move symmetrically across the economy.

Given current conditions, it may well be that approvals in NSW will lift in coming months, while those in Melbourne stagnate and possibly decline. The crystal ball is murky again, on this topic.

Overall, the resilience of the housing economy must have something to do with pent up demand, low interest rates and of course, the stimulus of the JobMaker program.

Finally, for the optimists, the concerns about zero Net Overseas Migration may be dissipating, at least a little. It is true that new arrivals are unlikely until at least late 2021 and probably somewhat longer than that. That will put a dent in demand for new housing.

But since the pandemic commenced, an estimated 400,000 citizens have repatriated to Australia. Many are couch surfing or have moved ‘home’. How long will that last before, as economic recovery occurs, new jobs are created and workers take up international tele-commuting? Not long, and not much longer than that before those same people create their own housing demand.

How much demand and when?

Well, sorry, the crystal ball has gone dark again.