Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go Hmmm...one of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Friday, 16 January 2015

Record High for New Home Starts

Record Highs

A fascinating day indeed for the markets!

The excitement and dust continues to settle around a second consecutive bumper employment report - we'll come back to this momentarily.

First, though, let's take a look in three short parts at a release which snuck under the business media radar today: the Building Activity figures for the September 2014 quarter.

Part 1 - Building Work Done

On the face of it seemed to be another weak set of data for perma-bears to wring their hands over, with the total value of building work done at $22,287 million declining by 0.9 percent in the third quarter.

This represents a moderate 5.1 percent increase in the value of building work done over the past year.

As you can see this has been driven almost exclusively by an 8.9 percent increase in the value of residential building.


However, all is not quite as it seems.

As we shall see in Part 3 below, there is now a huge volume of residential building work in the pipeline which will drive building work done to unprecedented heights through 2015 and 2016.

Victoria and New South Wales are the two state economies which have benefited most from the uplift in building work in chain volume measures terms.


The underlying data reveals that well over 40 percent of the building work in New South Wales by value is accounted for by non-residential projects.

The state's construction boom has largely been driven by a colossal uplift in non-residential building activity since 2012, including commercial developments such as the $6 billion Lend Lease (LLC) Barangaroo project.

Part 2 - Dwelling completions: Getting there!

The much-vaunted residential construction 'boom' has been mocked and summarily dismissed so many times that it has been all too easy to lose the faith.

All that has happened in reality is that all-time high building approvals are taking some time to flow through the data series (the quarterly activity data lags by more than 3 months anyway).

Firstly on the completions side there was an impressive 25 percent year-on-year uplift in the September quarter for dwelling commencements takes this data series tantalisingly close to a new series high.

The number of units and apartments completed in the September quarter actually was an all-time high at just shy of 21,000 - a massive 44 percent increase on the prior year figure.

It won't be long before the rolling annual number of dwelling completions breaks the record high, probably in the next round of figures for Q4 2014.


The historic data for house completions below shows why Sydney has had such a chronic undersupply of detached dwellings - the completion rate has been utterly appalling since the end of the preceding real estate boom in 2003.

Victoria, on the other hand, has been building at great pace in recent years. 


The state level data below implies that there has clearly been a marked uplift in the number of unit completions in the past year in Melbourne, Sydney and Brisbane.


It is vitally important to read and understand this data series in conjunction with our analysis of building approvals, particularly as the approvals figures drill down to the more useful capital city and dwelling type level.

The approvals figures suggest that while Sydney's apartment boom is likely to remain at such elevated levels only briefly before quickly paring back to far more manageable and sustainable levels, even the most recent monthly data shows Victoria continuing to wave through approvals at an alarming pace - particularly so high-rise units. 

Perth also looks set to join the apartment overbuilding party in due course.

In the next couple of weeks I plan to issue a couple of articles detailing where we are likely to see the pockets of Queensland oversupply, directly from Brisbane with photos, so stay tuned for that! 

Part 3 - Dwelling commencements: boom!

The commencements data completely shot the lights out, breaking all manner of records in the September quarter. 

Where to start? Total commencements of 52,380 in the quarter was a record high and a massive 26.4 percent increase on the prior year.

23,631 unit and apartment commencements was another record high and a kahuna 47.5 percent increase on the 2013 comparative.

Rolling annual commencements therefore easily smashed record heights both for units apartments and dwellings in aggregate.


The number of houses commenced is now rising everywhere except Adelaide.


Unit commencements have also boomed across the board - with all four of the largest states simultaneously recording record high unit commencements - but appear likely to be sustained most in Melbourne, with approvals in Perth also still rising.

The approvals figures  do show that Brisbane and Sydney have now past their peak approval levels.


New South Wales has historically recorded an elevated figure for unit approved but not yet commenced - however this figure showed a 20 percent decline in this quarter suggesting that the backlog is drying up.

The Wrap

There have been many, many conspiracy theories doing the rounds in recent years about the supply of residential building being deliberately blocked in order to push up dwelling prices.

The above data shows that there has been no such conspiracy and the theories were bogus - as interest rates declined and prices began to rise in this cycle, so too have dwelling approvals and commencements - to the highest level ever recorded.

The primary constraint on the volume of residential projects being delivered was evidently related to construction cost and profit margins, as argued here all along - if the numbers stack up, developers are gonna develop.

Of course at the micro and suburb level in our capital cities there do remain obdurate supply constraints.

Some are purely geographical in nature, such as a limited amount of prime location land. Others are related to NIMBYism, obstruction and planning barriers. 

Thus while formerly industrial areas such as some of those around Sydney airport or to the south of Brisbane may see countless high-density projects and unit approvals waved through with abandon, we will simply never see a proliferation of high rise approvals in some of Sydney's leafier eastern or lower north shore suburbs.

It has ever been thus. Buyers of residential real estate therefore need to understand which suburbs will always suffer from the latter supply constraints if they want to acquire assets with a genuine scarcity value and thus achieve the results they crave.

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Brisbane@allenwargent.com
Sydney@allenwargent.com