Over recent months there’s been a lot of attention paid to the availability of finance in the housing market alongside the impact of falling interest rates.
However, there’s been less attention paid to the falling levels of construction activity and the potential impact of falling supply over the next few years. The trends are already evident and will not only impact prices, but also wider economic activity and employment.
Among my contacts several home developers have helped put the current market into focus, what I’m told is that markets have quickly started to move away from selling existing, already built homes, to more selling off-the plan. It appears that existing stock is fast being sold.
Figures from the HIA and the ABS tracking construction activity for both new homes and apartments shows falling activity, a trend that is also starting to show-up in less construction jobs.
The construction slow-down was first highlighted clearly in June economic statistics which showed building approvals fell -1.2% to be 25.6% lower than just a year ago. However, it is the trend approvals that are now annualising around 174,000, the lowest since June 2013, that’s a big concern.
The June figures show that annualised building approvals for houses have fallen 14.5% and approvals for apartments have nose-dived by 38%.
New construction is expected to fall even more as there’s a backlog of new supply still in the pipeline, new building approvals number will get worse as we start to see cranes disappear from the skyline.
While there is a big measure of existing supply, this will soon start to be absorbed, and while that will not happen over-night, a revival in construction takes time and that’s when supply will be negative.
The Job Market
The economy and jobs market are now possibly facing a rough few months as residential construction continues to slow, with some predictions of 100,000 lost construction jobs.
However, with a less frantic labour market, private home renovations and building might increase as it becomes easier to secure contractors.
The job market looks less secure as the ABS reported a 1.2% drop in building approvals across the country last month, led the 5.4% fall in NSW. These figures are a possible pointer that more construction jobs could be lost.
While there was a small lift in approvals for houses, up by 0.4% in June, they are down by 14.8% over the past 12 months, approvals of units and apartments fell a further 6.5% in the month.
Approvals in the apartment sector have now fallen by 39.3% over the past 12-months. Headlining the biggest drops have been unit blocks four storeys or taller, in NSW these approvals were down 50% over the past two years.
Assuming the current rate of population growth, these figures are now seeding the chance of a national shortfall in housing construction. This view has only gained recent support as areas of over-supply were seen as moderating this risk.
Separate figures from the HIA highlight the increasingly fragile level of new and established homes on-market. In the last financial year there were a net 56,357 house sales nationally, that was the lowest annual number since the 1991 recession and further highlights to risks to the entire economy of a slowing construction sector. Building approvals in 2018/19 were 19.5% lower than in the preceding year, making this the most significant market correction since 2000.
The recent ABS monthly building approvals data covering all states and territories adds further weight and shows that in 2017/18 there were more than 232,000 buildings approved in what was a continuation of a sustained boom in home building.
Since then the sharp contraction in 2018/19 has been exacerbated as credit conditions tightened and economic growth slowed. The downturn in detached house approvals was a relatively modest 10.0% in 2018/19 while approvals for apartments contracted by 30.1% in the year to June 2019.
In recent months, the decline in approvals has slowed but continued to fall with a decline of 1.2% in June. However, recent data pre-dates the impact of the recent cuts to interest rates and somewhat limited easing of lending regulations. However, it remains to be seen if these factors will help contain or even boost building activity over the remainder of 2019.
National figures reflect the wider trend and seasonally adjusted building approvals in June 2019 were up by 9.7% in Victoria and were flat in South Australia. Approvals declined in Queensland -1.0%, New South Wales -5.4%, Western Australia -8.6% and Tasmania -11.9%.
In trend terms, approvals in June lifted by 5.8% in the Northern Territory and were down by 4.7% in the ACT.
The low number of approvals in the first three months of 2019 are of concern as they point to wider economic woes, loss of employment and possibly future short supply in the housing market.
This quarter the number of new homes being built has fallen by 15.2% this year and a further decline in activity through this calendar year of around 11% is expected.
Early data suggests that the housing market has adjusted from a strong annualised rate of home building of around 230,000 homes per year this time last year, to around 183,000 at the start of 2019, a correction that happened very quickly, in just six months.
Market confidence declined rapidly towards the end of 2018 as house prices fell, exerting a negative impacting all segments of the market. Investors and owner occupiers went slow, and foreign investments left the market reacting to a range of government restrictions.
The drop in building activity was not helped by the fact that the Australian economy grew by just 0.2% in the December 2018 quarter, even before the full impact of the credit restrictions were felt in the wider economy.
According to the HIA the interest rates cuts in 2019 will not have the same positive impact as previous cuts on new home building. The partial easing of APRA’s lending restrictions should have a more significant impact on home building. However, the impact of a slowing economy and the ongoing impact of the tight credit will continue to contain new home building starts.
However, lower rates better loan conditions should lead to more positive data later this year. Already demand for home loans saw a modest lift in June but remains well below earlier levels. Construction lending was down by 2.3% in the month while lending for newly built homes fell by 1.2%, the lowest level since 2013.
Investor lending posted only a modest 0.5% increase in June – the first monthly increase in almost 12-months but remained soft and well below 2017 levels.
While the recent absence of investors and far fewer off-shore buyers has helped create a more competitive FHB environment, the falling levels of house and apartment construction may well soon herald supply shortages in 2020/21 pushing up-prices.