Housing approvals hold on in March, but the crunch will come

A month can be a very long time, as the latest housing approvals data demonstrates. Dwelling approvals in March 2020 were 15,386 total units, up 2.0% on March 2.0% on March 2019 and around 2.0% lower than in February 2020. There seems little doubt that had the pandemic’s impacts not hit the economy from mid-March, the expected improvements in the housing market would have been realised.

Annualised, as the chart below shows, dwelling approvals reached 172,101 units for the year-ended March 2020, down 13.3% on the prior year. As the chart below shows, annualised approvals were 0.2% higher than for the year-ended February 2020, with approvals having plateaued for the last six months.

Fig.1

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It was approvals of free-standing houses that really stand out in the current data. At 9,003 separate approvals, houses were up 1.1% on March 2019 and 4.5% higher than in February 2020.

On an annualised basis, house approvals totalled 102,792 units, down 11.4% on the prior year. The table and chart below show approvals for all of the dwelling types.

Fig. 2

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So, housing approvals held on in March, with most of the approvals having been signed up in builder and developer pipelines comfortably before the end of the month.

Disturbingly, new commitments reported to the HIA by its members, fell a massive 23.2% in March 2020, compared to the prior month. Commitments – described as new home sales – come before approvals paperwork is submitted and given the stamp of ‘approval’. There is a lag, in other words.

What that means is that the crash in commitments in March will be taken up largely in April. Moreover, new commitments (sales) in April will be very soft. Some suggest they will be almost non-existent. March is unlikely to be better.

Compounding the management challenges that poses for the sector, is the fact that after a lacklustre 2019, all the evidence was that the housing sector was looking up in 2020. It was not just the approvals that had shifted up.

The chart below shows Houses (not other dwelling formats) at different stages of building activity. The red line shows houses completed in the December quarter numbered 25,525 (down 2.3% on the prior quarter), while the blue line shows there were 25,213 commencements (up 0.1% on the prior quarter).

These are important numbers because they show that work completed was replaced with work commenced (more or less) and just as significant, they show commencements were gearing back up.

Fig. 3

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On the green line, there were 58,111 houses under construction in the December quarter. That was still 2.6% lower than the prior quarter, but the other data was pointing to a turn around. In fact, we can expect this data line to be improved for the March quarter when it is released later this year. But that will clearly be a blip and not much more.

The next chart shows that while the total value of building work that commenced in the December quarter of 2019 was lower, its rate of decline was continuing to fall, with the total value down just 3.8% compared to the prior quarter. Feeding into that data, the value of Alterations & Additions lifted 1.3% in the quarter, recording its third successive quarter of growth.

Fig. 4

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Most telling though is the next chart, which shows the quarterly value of work on new Houses (as distinct from other housing formats) in the building pipeline, that had yet to commence. The pipeline returned to positive territory in the December quarter (+1.0%, valued at $55.354 billion), after three quarters of declines. In annualised terms, the value of work was still down, but though it is not shown here, it was not far off the record highs of 2018.

Fig. 5

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The point here is that had 2020 proceeded in the expected manner, the housing sector – and the building materials sectors that rely on it – would have been in positive territory in the June quarter of 2020, if not the March quarter.

Housing was going to be all the more important to 2020, because the evidence was pointing to the non-residential building sector falling back. Though it was not a disaster, the December quarter saw the value of work commenced fall back by 23.8% to total $10.920 billion for the quarter.

Fig. 6

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What may be most noticeable and significant in this data is the steep declines in the commencement of Commercial Buildings (-24.0%) and Industrial Buildings (-18.9%). These are crucial to the future productive capacity of the economy and probably go to the fact the Australian economy was subdued well before COVID-19 reaped its havoc. Whether the changed behaviours of the pandemic stick and more people accelerate remote working could determine the course of the Commercial sector. There may well be plenty of office vacancies coming up in coming years, that cause that sector to shrink altogether.

It is important to be clear, in conclusion, that historical data, up to and including March 2020, looks radically different to anything we can expect to see for the June quarter and almost definitely the September quarters of 2020. The housing sector may recover relatively quickly – there are population, income and liquidity issues to consider of course – but most worrying for the national economy might ultimately prove to be the huge slump in commercial and industrial building activity.