Housing conundrum

Huge rise in Building Approvals for July

After showing signs that the high density housing construction boom might be over in May and June when approvals to build private multi-occupancy housing units fell respectively 8.3% m-o-m and 5.5% they rebounded by an out-sized 23.0% in July providing the impetus for an 11.3% lift in total home building approvals in the same month. This is a particularly volatile statistical series, but even so the lift in home building approvals has lifted totals for the month very close to the heady monthly high reading around 21,000 (annualising above 250,000) back in early 2015. Private sector multi-occupancy home units approved in July at 11,393 were the second highest on record and were up more than 15% compared with July 2015.

Factors for the rise

This lift in home building approvals in July was probably in part driven by the RBA’s May cash rate cut – a sign that monetary policy even at very low interest rates still has some potency to stimulate activity. Another factor may have been the Federal Government’s May Budget and its proposed changes to superannuation that may have added to the relative attraction of negatively geared housing investment.

Potential negative influences ahead

These positives influencing demand for multi-occupancy units have offset negative influences including low rental yields and increasing rental vacancies; more demanding home borrowing conditions including virtual prohibition of lending by Australian banks to investment borrowers relying on foreign-based income to support borrowing; tightening restrictions on offshore investment in China; increases on state stamp duties and land tax to foreign investors; evidence of difficulties completing buy-off-the-plan transactions and physical signs of over-supply in parts of the Brisbane, Melbourne and Sydney new home unit markets where lights barely shine at night attesting to some newly-constructed blocks standing close to empty.

Implications of continued over-supply

The surge in multi-occupancy home building approvals in July, assuming (and it is a big assumption) that they translate to home units under construction over the next few months will add to a housing market already showing signs of over-supply. If home building approvals hold close to the July total they would run close to 80% of growth in Australia’s population – more than 100% in hot spot construction areas of Brisbane, Melbourne and Sydney. At some point, over-supply will cause prices to fall to help supply and demand for multi-occupancy units to come closer to balance. Very near-term the impact of the latest RBA rate cut in early August and possibly another later this year could prompt even more late-cycle housing demand and supply but that looks to us like the final straw for the housing boom.

When home building activity contracts in 2017 it is likely to run hand-in-hand with a reduction in household wealth generated by lower home unit prices and still very slow growth in household disposable income. Most likely a less confident household sector will start to focus on building savings to protect against an increasingly less certain future economic environment. The household savings ratio that has been falling over the past two years helping to fund growth in household spending may start to rise and limit growth in spending. Two key generators of growth, housing and household consumption spending, are likely to lose momentum, possibly a lot of their momentum. The key issue is whether anything else will take up the slack such as stronger government spending or rising business investment spending and exports. At this stage our view is possible but unlikely.

Our view is that the renewed surge in home building approvals in July will seed both stronger near-term growth but will add through even greater housing over-supply to pressures weakening the growth outlook in 2017.

[Economic Insights 31 August 2016_weekly.pdf]