Approvals of new dwellings seem to have come off the boil in recent months, with year-end data showing that 228,308 separate dwellings were approved in 2016, down 2.8% on 2015. But perhaps most telling, total approvals in December 2016 were down 12.4% on the prior December and 24.0% on November 2016. Meanwhile, debate on housing supply and affordability rages on, but with some level heads engaging, there could just be some light at the end of the policy tunnel.
The chart below, a perennial favourite, shows total Australian residential dwelling approvals on a monthly and year-end basis, as well as recording the number of free-standing houses approved.
To go straight to the dashboard and take a closer look at the data, click here.
The green line shows year-end approvals heading down, but it will be some months before that is rally noticeable, thanks to large numbers of approvals in some months of 2016. That is what makes the reported drop-off in approvals in December so significant. If it is confirmed by further declines in coming months, the boom is over.
Always of interest, the year-end approvals data, shown below broken down to the main dwelling types, shows where the decline in approvals is most being felt.
To go straight to the dashboard and take a closer look at the data, click here.
Approvals of free-standing dwellings fell 1.7% to 115,964 dwellings in 2016, while 4+ storey apartments declined a more hefty 7.2% to 69,806 separate approvals.
The impending end to Australia’s deepest and longest-running housing boom has had many commentators engaged in trying to find solutions that can deliver more stock, to soak up what appears to be pent up demand for new housing.
Importantly, as the Reserve Bank of Australia (RBA) pointed out in its Monetary Policy Statement earlier in February, the pipeline of residential dwelling activity that has been approved and is still to be completed “…has increased rapidly since 2013 to historically high levels, and this should continue to support dwelling investment over the next couple of years.”
Implications arising from this are that house prices are unlikely, according to the RBA at least, to head down anytime soon, and more stock will come onto the market than has historically been the case. As a result, it is more likely that investors will continue their strong position in the market. The number of available dwellings might increase and soak up some of the demand, but they wont be so successful at brining new participants into the home loan arena.
Moreover, and this is particularly relevant for those supplying wood products, the emphasis will continue to be towards the apartment towers. The RBA notes that “The shift towards higher- density housing is more in line with international norms, as Australia’s existing housing stock is heavily concentrated in detached houses and its cities have unusually low density compared with those in other industrialised economies.” For access to the RBA article go to: http://www.rba.gov.au/publications/smp/2017/feb/pdf/box-a-the-pipeline-of-residential-dwelling-work.pdf
That is important guidance for those in the supply of building products. This apartment revolution for Australia is normal elsewhere. We should expect to see apartments continue as large part of the housing mix for a long time to come. What is just as significant is that they are generally cheaper than free-standing houses, removing some of the pressures associated with ever-higher dwelling prices.
Under-supply may not be the problem
Although there are still plenty of pundits demanding that the solution to the ‘housing affordability crisis’ is to increase the available supply, there are rational voices that see the position differently. Writing in The Conversation in mid-February, Peter Phibbs, the Chair of Urban Planning & Policy at the University of Sydney and his colleague Professor Nicole Gurran, also from the University of Sydney debunked that myth.
The start by explaining that housing prices are set by the whole market, not just the new dwellings that come on line. So supply alone doesn’t reduce prices, especially because, as Phibbs and Gurran put it “…housing is an unusual good in that as prices increase, demand in the short term actually increases (it’s an asset market). This makes it much more difficult for supply increases to reduce prices.” Australia experiences that with investor demand growing as prices rise, exacerbated by low interest rates.
Essentially, Phibbs and Gurran make the ‘housing bubble’ argument here, but they add the role of the banks and developers in suppressing supply, in order to maintain higher and growing prices.
They go on to comment that Australia’s record housing boom has done nothing to suppress demand and thus, has not helped with affordability considerations. They pose the question of how much supply would be enough? Wisely, they avoid trying to answer the question, but they make the point that “…approvals are running at about double the actual dwelling construction levels,…” and therefore, a politically appealing thought bubbles such as “…“fixing” the planning system is unlikely to have much impact on dwelling supply levels.”
Addressing globalization of financial markets and the role of international investors, Phibbs and Gurran suggest they simply contribute to demand pressures.
So boiled down, the argument is that supply alone will not improve housing affordability, without some other measures also being implemented. Phibbs and Gurran don’t mince their words on that either, and we will leave it to them to speak for themselves:
“If politicians were serious about the affordability crisis, they would be trying to support the important but underfunded affordable housing sector. Better targeting tax breaks towards new and affordable rental housing, rather than fuelling demand for existing homes, would also help. But until our politicians can see past supply slogans we can expect very little policy change.”
For all that it’s an economic matter, and one of the most important in the domestic economy, housing markets and policy are all about people and how they behave.
