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Multi-residential approvals are housing’s lifeline

Australia’s dwelling approvals remained suppressed in November, with pockets of growth beginning to emerge, mainly in key-state multi-residential markets. Monthly approvals totalled14,529 separate dwellings for November, up 1.6% on the previous month following a 7.2% increase the previous month. Year-ending November 2023, national approvals were 164,954 down 8.3% on the prior year.

With so much work in the pipeline, the downturn in approvals has been concerning, rather than disastrous to date. More approvals in the main housing formats (free-standing houses and townhouses) will be welcome in coming months, especially for those engaged in the early stages of home building, like frame and truss fabricators, most sawmills and importers supplying them and the supply chain all the way back to growers.

Meantime, at a national level, where the objective is to build 1.2 million dwellings over the next five years, the lifeline of possibility is multi-residential dwellings, though as the HIA’s Tim Riordan has commented:

“A continued fall in the number of new homes approved indicates a slow start to the Australian government’s ambition to build 1.2 million new homes in five years starting mid-2024,…”

Year-ended November 2023, Australia’s approvals of Flats 9+ storeys were 21,547 down 8.3% on the prior year, with detached houses significantly lower at 101,086, down 12.9% over the same period.

There is not a lot of comfort in the mid-rise multi-residential approvals landscape currently, with approvals of Flats 4-8 storeys totalling 13,012 separate dwellings, down 21.4% on a year earlier. Like the tallest towers, those numbers can change quickly, with a single development potentially adding hundreds of approvals in a single month. That optimistic outlook has to be tempered by the reality that multi-residential developments often take years to come to market.

Australia is a large nation – at least geographically – and there is little uniformity in the state-by-state picture that makes up the national dwelling approvals landscape. There is considerable variation.

New South Wales has experienced a substantial increase in multi-residential approvals with approvals of Flats 9+ Storey totalling 8,144 units year ending November 2023 an increase of 31.2% on the previous period. This was offset in the aggregate approvals for the State, by a decline in detached houses of 18.7%.

By comparison, in Victoria, Flats 9+ storey approvals totalled 5,361 for the year ending November 2023, down 33.6% on the previous period, while detached houses were down a more moderate 11.4%.

Victoria’s house approvals totalled 32,716 for the year, while New South Wales experienced more than 10,000 less, at 22,297 approvals. Land prices, cost of rents and average housing prices appear to be significant drivers of the housing formats ‘preferred’ in each state.

In Queensland the results followed the same trend as NSW, with approvals of Flats 9+ Storeys, totalling 5,595 units up 9.6%, offset by detached houses at 20,554, down 9.4% year ending November 2023. Significantly, Flats 9+ were higher than Victoria for the period.

The multi-residential drivers may well be quite different in Queensland, given its different demographic profile, especially in the state’s South-East corner.

If there is a market distinction between the free-standing houses and multi-residential development approvals trends, it may well be who is driving the investment. Free-standing house approvals are mainly underpinned by a sale to a family with (or about to be with) a mortgage. Multi-residential developments are more likely to be determined by the investment cycles of developers and investors, including large funds.

Each has different sensitivities to interest rates and different time horizons. A family needs a house, while a developer needs a return, over time.

In that context – for all sectors, but especially the free-standing the townhouse dwellings – the direction of interest rates will be critical. Harry Otley of the Commonwealth Bank of Australia stated:

“The slower pace of tightening from the RBA is likely supporting approvals from very low levels. Furthermore, if monetary policy is eased this year, approvals can increase more materially given there remains high underlying demand for new housing amid the current shortage.”

Writing in Mortgage Business, Adrian Suljanovic put it in a more tractable and ‘retail’ way:

“Over 18 months of elevated cash rates have sent shock waves across Australia’s property sector and it is not only mortgages that have been affected – residential building approvals have also taken a serious blow.”

Dwelling approvals, by state, by format will be of enormous interest in 2024, and that means interest rates will be front and centre of mind for the entire housing sector in Australia.

Posted Date: February 7, 2024

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