The Australian Bureau of Statistics released building approvals data for May 2011 earlier this week that revealed a continued trend of weakness in the new home building sector.
During May 2011 there were 12,990 dwelling units approved, which was the lowest monthly number since June 2009. The trend is clearly towards less housing construction after dwelling approvals most recently peaked at 16,473 during March last year.
During the past 20 years the average monthly volume of dwelling approvals was 13,288, which means current approval volumes are 7.5% below average, and readings appear to be heading lower.
With indicative sales volumes tracking 26% below their long-term average in April it is clear that demand is soft in the residential housing market.
The low number of homes being approved for construction comes at a time when population growth is above the long-term average despite recent tapering off due to fewer overseas migrants.
Private sector dwelling approvals data showed that much of the slowdown in building approvals was in the detached housing market rather than units.
Private sector house approvals were 11.6% lower during the 12 months to May 2011 compared to private sector unit approvals, which fell by 0.3%.
The level of private sector house approvals is running 12.0% below the average of the last 20 years whereas private sector unit approvals are 9.9% above their long-term average level.
It isn’t a surprise that value of units is holding much stronger than houses because based on capital city median prices units are around $75,000 cheaper than houses.
According to the RP Data-Rismark Home Value Index capital city unit values fell by 0.2% during the 12 months to May 2011 compared to a much larger fall of 3% for houses.
It has been well publicised that consumers are cautious, spending less and not taking on significantly more debt, with those purchasing homes focusing more on the relatively affordable unit market rather than on houses.
During the past 12 months dwelling approvals were greatest in Victoria and lowest in the Northern Territory.
Looking at approvals during the past year and comparing them to annual approvals during the past 20 years Victoria (57.1%) and the Australian Capital Territory (112.5%) are approving dwellings at well above average levels.
Approvals in Queensland (-29.6%) and New South Wales (-23.3%) were well below average levels.
Based on raw numbers Victoria’s dwelling approvals accounted for 37% of all approvals nationally compared to New South Wales (20%), Queensland (16%), Western Australia (13%), South Australia (7%), Australian Capital Territory (4%), Tasmania (2%) and Northern Territory (1%).
Looking at recent population data there appears to be a significant disconnect between approvals and population growth in New South Wales, Victoria and Queensland.
Broadly speaking one would anticipate that as a percentage of national approvals each state should be approving new housing at a similar proportion to its population growth.
During the 12 months to December 2010 New South Wales population growth accounted for 27.0% of the nation’s growth but that state approved just 20.2% of the nation’s new dwellings.
Queensland accounted for 23.4% of the population growth but approved only 16.4% of dwellings.
In both instances it appears that a deficiency of dwelling approvals persists. It looks as if Victoria has been approving too many new dwellings, with the state accounting for 26.4% of the nation’s population growth compared to 37.2% of all approvals.
There is little upwards pressure on property values due to affordability constraints and a downturn in overall market sentiment.
There is a deficit of housing supply in New South Wales and Queensland but supply in Victoria is much more sufficient.
Rents are rising sharply in Sydney and given the disconnect between population growth and dwelling approvals it may result in further rental increases in Brisbane.
Perhaps more concerning is the prospect that once sentiment returns the disconnect between housing supply and demand will result in a run-up in property values in parts of New South Wales and Queensland.
The potential over supply of new home approvals in Victoria may result in ongoing subdued rental growth and capital gains across that market.
Achieving sufficient housing supply has been an abject failure at all levels of government and it is an area that needs much more attention.
Demand for the purchase of housing is easing but that doesn’t mean governments shouldn’t be planning for the needs of residents when conditions shift.
In parts of New South Wales and Queensland that may mean addressing the pipeline of new housing construction.
Tim Lawless is research director at RP Data
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