The ABS recently released preliminary data on new home building activity which provides an interesting update on the state of the market.
Overall, a total of 55,110 new dwellings are estimated to have been commenced during the June 2016 quarter. It is worth noting that this is a preliminary estimate, and that past experience suggests that this may be revised upwards. The number of starts during the June 2016 quarter was 9.5 per cent lower than the previous quarter and four per cent lower than the same period last year.
Over the year to June 2016, a total of 229,404 new dwellings are estimated to have been commenced. This compares with 231,706 new home starts over the year to March 2016. However, by the time the data are revised, it is likely that total commencements over the year to June will eclipse those for the year to March. Furthermore, there is a strong likelihood that new dwelling starts over the year to September 2016 may surpass the total for the 12 months to June.
Before looking ahead, it is worth assessing the significance of the new home building expansion of recent years. Lasting 15 quarters, it has proved to be the longest on record, at least since the commencement of the modern data series, having started out in June 2012 when new home building starts barely scraped 145,000 over the preceding 12 months. From bottom to top, new home building commencements have risen by about 60 per cent.
The upturn has been heavily driven by developments on the multi-unit side. Having bottomed out at 54,110 over the year to June 2012, multi-unit commencements more than doubled and reached what looks like a peak during the year to March 2016 when a total of 115,095 multi-unit commencements were recorded.
The expansion in detached house building activity was much more modest in comparison, with detached house starts peaking at 117,159 during the year to September 2015. This is markedly better than the trough of 89,656 during the 12 months to September 2012 - an upturn of 30.7 per cent. Interestingly, the detached house cycle started six months after the upturn in multi-unit activity and appears to have reached a peak at least six months earlier.
During the June 2016 quarter itself, detached house commencements were surprisingly robust, with starts increasing by 6.9 per cent to 30,199. This was the highest quarterly total for detached house commencements in over six years – a result heavily influenced by resurgent activity in the Victoria detached house market. In contrast, ‘other dwelling’ starts are estimated to have fallen by some 25.2 per cent compared with the previous quarter and reached their lowest quarterly total since the end of 2014.
The reduction in other dwelling starts was concentrated in Victoria (where there was a 34.7 per cent decline during the quarter) and in NSW where other dwelling commencements were down by 20.8 per cent compared with the March 2016 quarter. Other dwelling starts in Queensland also fell, by 29.4 per cent, during the June 2016 quarter.
Despite the big reduction in multi-unit starts during the June 2016 quarter, the pipeline of home building activity remains very substantial. High-rise apartment approvals increased by 21 per cent during the September 2016 quarter compared with a year earlier although there were big reductions in approvals on the low-rise apartment side of the market. Overall, the total number of dwelling approvals during the September 2016 quarter was 2.2 per cent higher than the same period a year ago.
With so much recent commentary around the future prospects for apartment construction, it is useful to assess the current pipeline of activity. Despite the large drop in starts during the June 2016 quarter, the volume of multi-unit dwellings awaiting commencement remains substantial. At the end of June 2016, 29,713 multi-unit dwellings had been approved but were awaiting commencement, with an additional 150,685 multi-unit dwellings under construction on the same date.
It is worth noting that more than half of the approved work awaiting commencement is in NSW, with the vast majority concentrated in the high-rise apartment segment.
Generally, increases in supply tend to ease price pressures in a market. Despite the very substantial inflow of new supply to Australia’s housing market over recent years, the latest numbers indicate that dwelling price pressures remain significant. During October 2016, dwelling prices are estimated to have increased by 7.5 per cent across Australia’s eight capital cities compared with a year earlier, with prices up by 2.7 per cent on the previous quarter.
There is a wide contrast between price developments in different markets, however. In Sydney, dwelling prices increased by 10.6 per cent over the year to October 2016, with Melbourne prices up by 9.1 per cent over the same period. In contrast, Perth prices have fallen by 3.7 per cent over the past year, with a decline of 3.8 per cent affecting the Darwin market.
A disproportionately large share of new dwellings have been released into the Sydney and Melbourne markets over recent years, and one can only imagine that the pace of dwelling price growth would have been even stronger had this new supply not come on stream.
The continued strength of dwelling price growth has serious implications for housing affordability. The recently released HIA Affordability Report for the September 2016 quarter explored the latest developments in each of the markets around Australia, taking into account dwelling price, interest rate and wage developments. During the September 2016 quarter, affordability improved by just 0.1 per cent compared with the previous quarter and was 2.5 per cent more favourable than a year earlier. The marginal improvement in affordability during the quarter was due to the RBA’s interest rate reduction during August and very modest growth in average wages, factors which just about counterbalanced the growth in dwelling prices over the same period.
The scope for sustained improvement in housing affordability over the coming years will depend on the trajectory of interest rates as well as the degree to which reforms are achieved with respect to land supply, planning and the taxation of new housing.