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Dwelling approvals continue to decline but could be flattening

Australia’s total new dwelling approvals fell 17.9% year-ended February 2023, declining to 182,591 separate units. House approvals were 20.2% lower at 112,763 for the year, in a falling market that is only just below previous recent peaks and in which there are signs, a new round of approvals may not be too far off.

The first chart shows houses and their approval peaks over the last fifteen years. It is most pertinent to note that if it were not for the recent profitless boom, house approvals running at over 112,000 per annum would be causing joy, not concern about declines.

The ‘early indicators’ of the housing market appear to be pointing toward the decline in new house approvals having bottomed out, or at least reaching the low point.

There has been considerable commentary in recent weeks, about the upswing in house prices, which historically flows through to confidence in new house sales. This appears to be occurring, with Stockland advising new house sales were up 12% on the average settlements in the second half of 2022.

True enough that those increases were prior to the May increase in interest rates, so the next round of data from the big developers and builders may tell a different story.

However, at the moment, what the new sales provide a reminder about is that Australia has a shortage of housing. The nation does not have sufficient dwellings to meet current demand.

Moreover, demand is growing because of smaller household sizes – see the previous item in this edition of Statistics Count – and the increase in net migration.

Higher property prices, pent up demand, increased confidence and new demand coming into the market all point to new approvals not being very far off, at a national level.

The interesting question will be what dwelling types will dominate the next round of approvals. It can be observed below that while free-standing houses continue to dominate, multi-residential formats are holding their own, with two formats doing especially well.

At one-end of the market 2+ Storey Townhouses, and at the other 9+ Storey Apartments are both experiencing solid and continuing demand and approvals. There are potent drivers for these efficient users of land to be dominating approvals, including the extent to which they can be built in a more timely manner than free-standing houses, with their attendant delays and chronically slow building rate.

An emerging suspicion must be that the household dynamic changed over the course of the pandemic and may never return to previous days. This is a complex matter, but as Peter Martin wrote in The Conversation, demand appears to be being created by a pandemic-linked social change that is being reflected in the current dangerously high costs of rent.

Martin points out rents started increasing before interest rates started to climb, some time around mid-2021. The driver was more demand and static supply. As the RBA’s research shows, the average household size declined from 2.6 to 2.55 people over the course of the pandemic.

That is not a large change, but economy-wide, Martin calculates that would add 140,000 dwellings to total demand!

The drivers for this household size decline are a little murky, but not so much that they are incomprehensible.

People coupling up and living with one or other set of parents because they are out of work (as was the case for a fair chunk of the pandemic) will eventually want a place of their own. A spare bedroom that has become an office forces a returning adult child onto the couch, which can never last for long, and so on.

So, demand for rental properties increases because the way we are living our lives has changed. That will quickly flow into demand for new dwellings that will be fit for purpose and we can relatively easily predict that smaller households, with different needs (is an office space actually an option now?) will drive a change in the housing formats that are most needed, purchased and built.

Posted Date: May 8, 2023

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