Approvals peak as market peeks around the next year’s corner

It is debatable – and constantly debated – but approvals for new dwellings appear to have peaked, with the latest data indicating there is an emerging turbulence in approvals. Most commentators now consider that approvals will decline in 2017 and fall somewhat faster in 2018, largely as a result of a decline in apartment building being led by New South Wales.

The peek over the top of the peak comes as 2016 draws to a close and approvals up to and including September will in large part have translated into commencements by the end of 2017. That is a good guide to demand and building activity forecasts for 2018, and of course, the data provides relevant pointers on future housing approvals. 

Many have been surprised by how long this housing boom has travelled, with expectations that the apartment building phenomenon would have crashed long before now. Beyond expectation however, the data and credible independent economists now appear ready to call time on the boom – albeit there are few who think a crash is imminent. 

As Callam Pickering of CP Economics wrote:

“Recently building approvals have held up surprisingly well creating some concern about an overbuild in cities such as Sydney and Melbourne (though Brisbane is perhaps the most at risk).”

He went on to comment that the recent volatility in approvals was entirely down to the higher-density sector (by which he means the 4+ Storey apartments in the main). Below is the chart that Pickering used to emphasise this point.

fig 6

The large rise in the blue line (higher density dwellings) has essentially underwritten the latest housing boom and the choppiness in the light blue line appears completely responsible for the volatility of the last few months. We know, in general terms, that markets are volatile when they are going through the paroxysms of change. Some liken it to a drowning man thrashing around desperately for something to cling to, but of course, in some changes, it’s the activity that comes before the legs and arms kick into gear for the next solid effort.

The much more stable (green) line for free-standing houses underscores their role in the multi-speed housing market. Houses remain the base load of the total market’s performance and this is the sector from which ongoing performance can be expected, even after the latest boom has finally washed through the economy.

Leaving aside WA, free-standing houses are pretty much stable, which cannot be said for approvals of apartments. Pickering’s chart below is useful to understand why the risks to approvals are in the higher-density dwellings.

fig 7

So the data points to a fall on the way and an end to the boom. So the question is, when will the boom wash through and how sharp will the fall be? 

They are good questions and there are no certain answers. However, Pickering and others are focussed on the early 2018 period. This is how Pickering puts it:

“There is still a high degree of uncertainty surrounding this but I'd wager that construction activity will peak in the next twelve months and then will gradually unwind in the latter half of 2017 before declining more rapidly the following year.”

That seems reasonable, but the qualifier might well be what happens with the higher-density apartments. Any rise in interest rates for instance, could have a more immediate impact on total dwelling approvals. Meantime, while the easily distracted have their eyes remain on the glitter and glitz of apartment approvals, we’ll keep our attention focussed on free-standing dwelling approvals.