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Housing approvals: don’t you weirdos know we are in a recession?

Housing approvals continue to be remarkably stable, given all of the conditions influencing the Australian economy. At an annualised 172,204 dwellings, approvals for the year-ended August 2020 were just 3.2% lower than a year earlier, underpinned by a resilient free-standing housing sector that seems almost incapable of reacting negatively to bad news.

Running at an annualised 105,620 dwelling approvals, free-standing house approvals are all but certain to hit a period of annualised growth before the end of 2020, that will, on current data, last until at least the early part of 2021.

The first chart shows national dwelling approvals, and pretty unbelievably, even the monthly free-standing dwelling approvals for August were higher than the non-pandemic, not-in-recession approvals of a year earlier. The 9,635 approvals were a remarkable 8.4% higher than a year earlier.

The green line – total approvals – shows us the new housing market is marginally softer, but has plateaued and looks as though it may have turned the corner. We know detached houses have played their part in this trend, but what of the other housing formats?

The second chart shows the stability of houses – the big blue block – and the story is pretty similar for the semi-detached formats. At 7,094 approvals, single storey townhouses (semi-detached) were 3.7% lower, but the much larger two or more storey townhouses saw approvals down just 0.1% at 20,420 approvals. Put them together and they are just 1.1% softer, on an annualised basis than a year earlier.

The very minor contributions of one to three storey flats can be passed over here, because the big news is that approvals for four or more storey apartments – including city apartment towers – were 8.0% lower year-ended August 2020 than for the prior year. Still, at 35,847 approvals, they have not crashed entirely, and like the entire market, appear to be showing recent resilience.

What of the different regions? Well! We hear of the asymmetry of the national market and the expectation that states in deeper lockdown are now doing it tougher (absolutely true) and will struggle in the future (not as certain).

So, in the light of that orthodoxy, what do we think has been happening in the heavy-lockdown Victorian housing market? Tanked completely right? Nope. Not a bit of it!

In yet another sign that orthodoxy can be just plain wrong, total Victorian dwelling approvals were up 6.4% year-ended August, compared with a year earlier, with house approvals up 3.4% over the same period. In August itself, approvals totalled 3,401 dwellings, up 9.5% on August 2019. As we look at the chart below, we can thank stimulus money, time at home for buyers to get their act together and low interest rates for this astonishing result.

It is clear that there is confidence among those looking for a home that many of us struggle to reconcile with the other realities right now.

In this final chart, we drill into the Victorian dwelling approvals. It might be that there was along pipeline of pent up demand to fill in Victoria, but they are certainly going about their business right now.

The only housing format in Victoria that has declined over the last year are three storey flats. Houses are up 3.4% at 37,115 year-ended August, townhouses are up 5.1% (one storey) and 5.6% (two plus storey) and the big mover among the major groups is four plus storey apartments, up a very large 17.4% to 13,036 separate approvals.

Bizarre as it seems, confidence among home buyers is at its highest level in more than a year, especially in Victoria.

The mix of Government stimulatory measures for the housing sector sees the Westpac-Melbourne Institute Index of Consumer Sentiment showing a 10.6% rise in those who consider it is timely to buy a dwelling. Coupled with that is expectations of rising house prices among consumers, albeit that regulators and commentators are urging caution.

Despite the cautions we would normally expect when the economy tanks, the stimulus packages saw very large increases in new residential housing lot sales over the last three to four months, even in Melbourne where getting out to do inspections was well-nigh impossible for three months.

The drivers for increasing house prices – other than confidence – just are not there right now and they will not be in 2021 when migration is stalled, as the next item in Statistics Count addresses.

Maybe ultra-low interest rates are a key driver for confidence, but as we discussed earlier in this edition, they reflect a lack of economic performance and low wages growth, more than anything else.

The exception to this rule could be the development of significantly more social and community housing. Michael Bleby reported in the Australian Financial Review in mid-October that the Simonds Group was expanding its existing interest in this sector to consider regional options. Their thesis is the pretty sound one that says post-pandemic, the migration from capital cities to the regions will only intensify.

Participating in the sector means having some engagement with the federal government’s National Housing Finance and Investment Corporation and probably with more long-run capital like superannuation funds, where the stability of the capital can offset the lower rental returns for this type of housing, fitting into the risk-return profile of that class of investors.

These are strange times and whether from consumers or large builders, there are a variety of signals in housing markets to add to the complexity. 

Posted Date: November 5, 2020

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