Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 1 April 2015

Reach for the stars!

Record high approvals

The ABS released its Building Approvals data for the month of February 2015 today, widely reported as a "fall" in total approvals to 18,768 or 3 per cent lower than the preceding month.

Well, yes OK, if you say so. But it was still the second strongest result ever recorded, sending building approvals on a rolling annual basis rocketing to a never before seen 205,929.


It's notable that house approvals seem to have tiptoed past their cyclical peak in rolling annual terms, but unit approvals are up very strongly by 36 per cent on an (highly unreliable) seasonally adjusted year-on-year basis and 9 per cent on a (much more reliable) rolling annual basis.

Unit approvals are sitting comfortably at record highs in response to the prevailing low cost of capital and rising dwelling prices, and so the residential construction boom continues.

House approvals in most states and territories look peaky, and sit well below previous cyclical peaks.

Record high unit approvals

Unit approvals, on the other hand, are on a roll. 

Rising prices in Sydney - where dwelling prices are reportedly up by a rip-snorting 6 per cent since the start of the year - have resulted in a much-welcomed second wind for unit approvals. 

Another 2,773 Sydney unit approvals in February 2015 takes the rolling annual total back up to 25,440 for the harbour city, and the record rolling annual high for Sydney units of a shade over 27,000 looks set to soon come under threat.

Not that this is much concern for the harbour city with an inherent undersupply of dwellings and a rampaging annual population growth now approaching 90,000 per annum.

Melbourne does not have an undersupply of units - it has quite the opposite problem, in fact - yet has approved a stonking all-time record 26,712 new units over the past 12 months, with no clear signal that the approvals boom is yet abating. 

The most interesting aspect of this trend in Victoria is the sheer volume of 4+ storey apartment blocks being waved through for approval, which will result in a clear-cut oversupply, no questions asked.

If I was an investor in Melbourne - or for that matter anywhere, because this trend is reflected across Sydney and Brisbane too - as always, I'd be steering well away from the large multi-storey unit blocks. 

If you're intent upon buying a unit, look for something in a boutique block, and in particular with a level of scarcity value.

Summarily much of the new dwelling stock is presently being constructed specifically for the purpose of offshore sale to investors in mainland China, rather than with domestic buyers or tenants in mind.

Supply is set to get way ahead of underlying demand in this sector leading to capital losses for many of the buyers of today's new apartment stock.

Record building - a boost for the economy

The residential approvals boom serves two purposes from the Reserve Bank's perspective - construction will help to offset the significant decline in mining engineering activity and employment, and it should help to keep a lid on frothy dwelling prices and rents too.

The total value of residential building jobs approved slipped back a little from January's record highs, but in rolling annual terms is now at the highest level ever at $61 billion, following a massive 37 per cent surge since the mid-2012 nadir of activity.

The notion that building units and apartment is inherently "less productive" is flawed. 

For the reasons I discussed here, land remediation and other development costs of new modern apartment blocks in cities can be surprisingly punitive. 

Consequently the rolling annual value of residential building jobs relating to unit and apartments has romped to a record $21 billion which is not too shabby at all, and should result in the usual strong economic multiplier associated with dwelling construction.

The latest Detailed Labour Force figures showed that construction jobs in aggregate have actually increased over the past year (+45,800) despite the inevitable declines in mining construction, mainly due to the still nascent residential construction boom.

The states which will derive the most economic benefit from this building boom will be Victoria ($18 billion of residential building jobs approved on a rolling annual basis), New South Wales ($16 billion), Queensland ($11 billion) and Western Australia ($9 billion).

The wrap

What more to say? January and February 2015 were the two greatest ever months for building approvals in Australia, and on a rolling annual basis building approvals have smashed all-time records. 

From a property buyer's point of view, there is an awful lot of high-rise unit stock being approved and constructed. 

And while I'm hardly one for dishing out unsolicited investment advice...ahem...don't panic Mr. Mainwaring!