Townhouse approvals hit 7½-year high before Omicron 

Building approvals; Construction activity gauge

• Dwelling approvals rose by 8.2 per cent in December – the biggest lift in 9 months – to 17,698 units. But approvals are down 7.5 per cent on a year ago. The value of all residential and commercial building approvals stood at a record $146.8 billion in the year to December. Townhouse (one story or more) approvals – as a share of total annual building approvals – hit 7½-year highs of 20.2 per cent in December.
• The AiGroup and Housing Industry Association (HIA) Performance of Construction index (PCI) fell by 11.1 points – the most in 20 months – to 45.9 in December/January, indicating a contraction in activity.

What does it mean?

• Council approvals to build new dwellings jumped 8.2 per cent in December – the biggest lift in nine months. The increase was driven largely by a 27.5 per cent jump in in the volatile private sector dwellings excluding houses (that is, high density or apartment) approvals. The lift followed a sharp pull-back in apartment approvals in October (down 38.3 per cent) due to Delta virus lockdown disruptions.
• That said, in December the number of apartment approvals in Greater Sydney more than doubled, lifting to 1,898 units from 924 units in November. Overall NSW building approvals jumped 32.1 per cent in December – the biggest monthly lift in two years (since November 2019).
• Activity in the high-density segment of the housing market was buoyant at the end of last year. In fact, townhouse (one story or more) approvals – as a share of total annual building approvals – hit 7½ years of 20.2 per cent in December. While Aussies have exhibited a strong preference for larger detached houses with backyards during the pandemic, demand for townhouses remains buoyant, reflecting an ageing population. Demand for apartments and townhouses could lift later in 2022 as the international borders reopen with students and workers returning to inner cities.
• The value of approvals for home renovations remained elevated in December, up 5.2 per cent to $1,050 million, a smidgen below record highs. And while council approvals for detached houses continued to ease from record highs, total building approvals (for all apartments, houses, commercial and renovations) stood at 227,779 at the end of December, up 22.5 per cent on the year and just 6.4 per cent below all-time highs at the heights of the Sydney and Melbourne high-rise construction boom.
• Another key leading indicator of construction activity – the Australian Industry Group (AiGroup) and Housing Industry Association (HIA) Performance of Construction Index (PCI) dipped 11.1 points – the most since April 2020 – to 45.9 points in December/January. The contraction in monthly activity was the third biggest since the PCI series began in September 2005.
• The rapid spread of the Omicron virus variant was behind the latest downturn in construction activity with rising infection numbers on building sites exacerbating labour shortages and building supply constraints. All four major construction sectors reported a weakening in activity between November and January with the strongest contractions reported for apartments, housing and commercial building.
• Construction work should pick up after the Omicron virus wave subsides, as restrictions are eased and the strong pipeline of residential projects is drawn down. However, labour shortages, difficulties sourcing building materials and cost blowouts for some building materials may mean it takes longer than normal to complete this work.
• And rising fixed mortgage rates, tighter macro-prudential controls and less government policy stimulus, will likely slow the frenetic pace of residential construction in the back end of 2022. A start to the Reserve Bank cash rate normalising cycle, which Commonwealth Bank (CBA) Group economists expect to begin in August 2022, could also weigh on housing demand and building approvals.

What do you need to know?

Dwelling approvals – December

• Dwelling approvals rose by 8.2 per cent in December – the biggest lift in 9 months – to 17,698 units. But approvals are down 7.5 per cent on a year ago.  In rolling annual terms, dwelling approvals stood at 227,779 at the end of December, up 22.5 per cent on the year and just 6.4 per cent below all-time highs.
• Private sector houses fell by 1.8 per cent in December to be down 21.3 per cent on a year ago.
• Private sector dwellings excluding houses increased 27.5 per cent in December to be up 24.5 per cent on a year ago.
• Dwelling approvals across states in December: NSW (+32.1 per cent); Victoria (+2.5 per cent); Queensland (-14.8 per cent); South Australia (-0.3 per cent); Western Australia (-7.7 per cent); and Tasmania (-7.4 per cent).
• Approvals for private sector houses rose in Western Australia by 0.8 per cent, but fell in all other states: NSW (-7.9 per cent), South Australia (-7.1 per cent), Victoria (-1.5 per cent) and Queensland (-0.7 per cent).
• The value of all commercial and residential building approvals fell by 2.1 per cent in December. Total residential approvals rose by 7.8 per cent with new building up 8.3 per cent. And alterations & additions rose 5.2 per cent, but commercial building dropped by 16.3 per cent.
• The value of all residential and commercial building approvals stood at a record $146.8 billion in the year to December.

Performance of Construction Index (PCI) – December/January

• The AiGroup and Housing Industry (HIA) Association Performance of Construction index (PCI) fell by 11.1 points – the most in 20 months – to 45.9 in December/January, indicating a contraction in activity.
• The AiGroup reported, “The sharp reduction in the headline index partly reflects the impact of the more infectious COVID-19 Omicron variant – respondents reported staff shortages as increased numbers of people isolated across the period. All four sectors in the Australian PCI reported weaker results in December 2021 and January 2022 compared to November – engineering was stable but housing, commercial and particularly apartments recorded strong contractions.”