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Residential building approvals are running at a record high.
We expect new dwelling construction to be 193K in 2015, staying near the record level of 2014.
- The major drivers of housing construction are firm population growth, very low mortgage rates and rising house prices.
- Recent dwelling construction outcomes will be well above underlying housing demand estimates of 180K.
- State variations should continue to be expected, with differences in population and jobs growth the major cause.
- National house prices are expected to rise by 5 to 8% in 2015. Lending growth is forecast to moderate.
New Dwelling Construction
Residential building approvals are running at a record high. Following concerns of a slowdown in the housing sector in mid‑2014, approvals growth had a “double bounce” in late 2014. Annual approvals are currently sitting at 199K which is 21% above the decade average. Dwelling starts should total a record 198K in 2014 and 193K in 2015. This compares very favourably to the 2005‑12 average of 155K.
In this construction upturn, multi‑unit dwellings have been the major driver of activity. Currently, more than 40% of new dwelling investment is in the multi‑unit sector, much higher than the 30% of the long‑run average.
Because of the significant influence of the multi‑unit dwelling sector in new construction, there has been a tendency for construction activity to lag trends in approvals by longer than usual. High‑rise developments normally have a longer start time after approval because of the more complex and extensive on‑site preparations, foundations and basements compared to the construction of a detached dwelling.
These long lead times are the major reason for our expectation for an extended plateau in the housing peak (especially when compared to other cycles). As a proportion of GDP, new dwelling investment looks like it will increase to 3.1% of GDP in the second half of 2015 and plateau at that level for a few quarters.
State and local governments are promoting a greater proportion of multi‑unit developments, such as suburban and inner‑city apartments. It should help contain transport and infrastructure costs for future residents and governments. It may also assist in alleviating housing affordability pressures. This could be mainly through supplying more lower priced dwellings in areas of high demand like the inner‑city.
Forward looking indicators of construction demand for houses and the multi‑unit sector have plateaued at record highs recently. Building approvals look set to run at annual rates near 190k for some time yet. This trend is important for new dwelling construction. We expect interest rates to remain on hold over 2015. It means that record low mortgage rates are likely to remain in place and will continue to stimulate demand for housing.
By Diana Mousina CBA Economics
