Leading economists are predicting the end of the housing boom as approvals appear to have peaked and may have commenced a long-awaited downturn. Although approvals for the year-ended February 2016 were up 8.8% on the prior year at 229,608 separate dwelling approvals, the month-on-month data tells a different story. In February, total approvals declined 0.5% compared with those for February 2015.
Approvals increased by just over 20,000 separate dwellings on a year-on-year basis, with free-standing houses growing by just 1,685 approvals or 8.3% of the total growth for the year. As expected, and as the chart below implies, the big mover was apartments of 4 or more storeys. Approvals for the year ending February 2016 were 70,666 up from 54,396 year ending February 2015 an increase of 24.5%.
All indicators are that peak growth in housing approvals is now firmly in the hands of those seeking to sell (and purchase) apartments. The baseload of approvals continues to be delivered by free-standing houses.
To go straight to the dashboard and take a closer look at the data, click here.
While the data may suggest approvals have peaked and the downturn in building approvals has commenced. There are several cautionary notes to be applied.
First, the influence of apartment approvals (which are done in large numbers as a building group or batch) can adjust monthly approvals reasonably dramatically. One swallow does not a summer make!
Second, house prices have tracked sideways since October 2015, but have not fallen, despite the opportunity for a New Year correction.
Third, unlike in past booms, the signs do not appear to be pointing towards a bust, brought about by significant over-supply, falling prices and borrower’s incapacity to pay mortgages compounded by rising interest rates. Rather, the data and leading commentators suggest that a ‘soft landing’ is the most likely outcome.
As Paul Bloxhom, HSBC’s Chief Economist wrote in Property Observer on 12th April 2016:
“Our central case is for a soft landing. We see housing prices rising by 3-4 percent in 2016, following growth of 9 percent in 2015. Housing construction is also expected to slow.”
Mr Bloxhom addresses the potential over-supply of apartments in particular, but focuses more attention on the distribution of housing approvals around the country. As he puts it:
“In Sydney, where housing prices have risen by the most, our estimates suggest that there is still undersupply, which is likely to keep prices from falling.
In Melbourne, the apartment market appears oversupplied, but the detached housing market does not. For apartments, some have also been bought by foreign buyers with the likely intention to hold for a long period, as a store of value, rather than for speculation.”
The charts below display approvals for each of New South Wales and Victoria, to add some context to Mr Bloxhom’s comments.
As the New South Wales chart demonstrates, over four years, apartment share of new dwelling approvals has been growing dramatically. For the year-ended February 2016, 27,989 apartments in a four or more storey building were approved, accounting for 43.0% of all approvals. Free-standing houses accounted for 41.4% of the total over the same period.
As total approvals in New South Wales have grown, the growth has been dominated by the more volatile apartments sector, but that is unlikely to lead to a disaster.
To go straight to the dashboard and take a closer look at the data, click here.
The situation is different in Victoria. Free-standing dwellings continue to dominate, as the chart below shows. For the year-ended February 2016, they accounted for 51.1% of total approvals.
To go straight to the dashboard and take a closer look at the data, click here.
Ultimately, the HSBC view, shared by others, is that the major risk of a housing over-supply bubble will be the capacity of households to pay. With interest rates at 2.0% and net debt a low 18% of GDP, the risks are low, especially with stronger prudential controls on banks in general and their lending policies in particular.
All that adds up to a slow-down in housing approvals over the next year or more, without a significant bubble or crash. For those supplying the housing market, that’s good news at this point in 2016.
