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Building approvals at record highs

Tue, 04 Mar 2014 20:50:34 +0000

Dwelling approvals; Balance of Payments; Government Finance

Building approvals up in January.

Dwelling approvals soar: Dwelling approvals rose by 6.8 per cent in January. Approvals are up 34.6 per cent over the year. Approvals rose to 17,104 in February – a record high and well above the decade average of 13,408.
The all-important reading on private sector house approvals rose by 8.3 per cent in January to near four-year high, while ‘lumpy’ apartment approvals rose by 4.7 per cent.
Trade sector adds to economic growth: Net exports (exports less imports) will add 0.6 percentage points to economic growth in the December quarter. The terms of trade (ratio of export prices to import prices) rose by 0.7 per cent in the December quarter. The current account deficit narrowed from $12,539 billion to $10,139 million.
More assets overseas: For the first time on record, the value of assets Australians own overseas exceeds the amount of assets owned by foreign investors in Australia.
CommSec estimates that the economy grew by 0.8 per cent in the December quarter to be up 2.7 per cent over the year.

What does it all mean?

The recovery in new home building is nothing short of sensational. Building approvals are now 27 per cent above decade averages, and are at record highs. It is pretty clear that housing construction will be a strong driver of the Australian economy over the coming year. More importantly, the key forward indicator of residential building – private sector house approvals – surged by over 8 per cent in January and is just shy of the best levels in four years.
The latest data confirms that the housing sector is the shining light of the Australian economy. And with interest rates low, population rising and housing affordability still attractive, housing looks well placed to fill the void left by the pullback in mining investment. In fact the latest result will help ease Reserve Bank concerns when it comes to the disappointing planned business investment data released last week. Interestingly, dwelling approvals have now lifted to a rolling annual total of 182,000, well above the average of 158,000 approvals recorded since the global financial crisis.
The ongoing lift in housing approvals and rising new home sales, will support confidence and provide policymakers with a degree of encouragement – especially in combating excessive house prices. More homes being built over the medium term will keep a lid on aggressive house price growth. Simply, supply (construction of new homes) is lifting to meet demand, and will likely put downward pressure on prices. In short, no change in interest rate settings is required in the near term.
The ongoing current account deficit and record foreign debt increase Australia’s vulnerability to shocks and support calls for a lower Aussie dollar. However, the good news is that export receipts continue to lift, although debt serviceability deteriorated for the third straight quarter from the best levels in 30 years.
For the first time (ever?) Australians own more foreign assets than foreigners own here in Australia. Certainly the high Aussie dollar is a key factor causing Aussie consumers, businesses and fund managers to diversify their asset holdings.

What do the figures show?

Building Approvals:

Dwelling approvals rose by 6.8 per cent in January after a 1.3 per cent fall in December. Approvals are up 34.6 per cent over the year.
The current number of dwelling approvals (17,514) is well above the decade average (13,472) and five-year average (13,757).
House approvals rose by 8.6 per cent in January (private sector up 8.3 per cent). Meanwhile ‘lumpy’ apartment approvals rose by 4.7 per cent in January after falling by 0.9 per cent in December.
House approvals are up 26.1 per cent over the past year while apartments are up 46.3 per cent.
Across states in January: NSW approvals rose by 5.4 per cent; Victoria rose 10.4 per cent; Queensland rose 1.2 per cent; South Australia rose 10.5 per cent; Western Australia rose 5.6 per cent; Tasmania rose 10.5 per cent.
The value of all commercial and residential building approvals fell by 3.8 per cent in January after rising by 3.1 per cent in December. Residential approvals fell by 1.4 per cent with new building down 2.1 per cent and alterations & additions up 4.5 per cent. Commercial building fell by 7.2 per cent after rising by 9.0 per cent in January.

Balance of Payments

The broadest measure of Australia’s external position – the current account – improved in the December quarter (smaller deficit). The current account deficit narrowed from $12,539 million to $10,139 million in the quarter. The balance of goods and services was in surplus by $247 million after a $2,672 million deficit in the December quarter.
For the first time, Australians own more assets overseas than foreign investors own here in Australia. At the start of the December quarter, net foreign equity in Australia was $27 billion. But transactions reduced foreign equity by $5 billion; price changes cut foreign equity by $18 billion; exchange rate changes reduced the total by $21.5 billion; and other changes cut the total by $5.6 billion. At the end of the December quarter, net foreign equity was negative $23.1 billion.
In the December quarter exports of goods and services rose by 3.2 per cent in current price terms with volumes up by 2.4 per cent and prices up 0.8 per cent. Imports of goods and services fell by 0.4 per cent in current prices with volumes down by 0.6 per cent while prices rose by 0.2 per cent.
The trade sector (exports less imports) will add 0.6 percentage points to economic growth in the December quarter.
The terms of trade (ratio of export prices to import prices) rose by 0.7 per cent in the December quarter after a 3.1 per cent fall in the September quarter.
Net foreign debt rose by $34.3 billion to a record $852.9 billion in the December quarter.
The debt servicing ratio (net income on foreign debt to goods and services credits) lifted again (worsened) from the 30-year low of 6.4 per cent in the March quarter 2013 to 7.3 per cent in the December quarter. It was the third straight quarter that the servicing ratio has deteriorated.

Government Finances

Government consumption spending rose by 0.3 per cent in the December quarter after rising by 1.0 per cent in the September quarter. And total public investment lifted by 4.3 per cent in the December quarter after soaring by 39.6 per cent in the September quarter. Overall, spending by the government sector rose by 1.2 per cent in the December quarter after lifting by 7.2 per cent in the September quarter.
The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth.
Investors remain keen about putting their money to work in the housing market. Certainly there are plenty of grounds for optimism with rising population, low interest rates, government grants for new construction and tight housing markets.
The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply and economic activity more generally. It is clear that home construction will play a key role in driving the broader economy in 2014, taking over from the mining sector. And arguably more industries and regions will feel the benefit of increased home building rather than mining construction.
The outlook for home builders, developers and building material suppliers continues to brighten. But for housing-dependent businesses, conditions will vary depending on their ability to capitalise on the strength in apartment building rather than free-standing houses.

What is the importance of the economic data?

The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth.

What are the implications for interest rates and investors?

Investors remain keen about putting their money to work in the housing market. Certainly there are plenty of grounds for optimism with rising population, low interest rates, government grants for new construction and tight housing markets.
The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply and economic activity more generally. It is clear that home construction will play a key role in driving the broader economy in 2014, taking over from the mining sector. And arguably more industries and regions will feel the benefit of increased home building rather than mining construction.
The outlook for home builders, developers and building material suppliers continues to brighten. But for housing-dependent businesses, conditions will vary depending on their ability to capitalise on the strength in apartment building rather than free-standing houses.

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Home approvals slump but renovation in vogue

Wed, 05 Jan 2011 23:59:40 +0000

Building Approvals; PSI

The outlook for home builders is gloomy. Approvals to build news homes slumped by 4.2 per cent in November. The slide in approvals marked the seventh decline in eight months. Over the past eight months approvals have fallen by 23 per cent
The all-important new house segement was down by 2.0 per cent and apartment approvals fell by 2.0 per cent.
The value of building approvals fell by 3.5 per cent in November to be down 32.5 per cent in annual terms, largely driven by a weakness in commercial building.
The value of alterations and additions rose to record highs in trend terms as a growing number of people elect to renovate rather than move.
The services sector is still going backwards. The Performance of Services index rose modestly from 46.2 to 46.4 in December. Any reading below 50 suggests that the services sector is contracting. The services sector contacted for ten months in 2010.

What does it all mean?

The latest slide in building approvals rings true with the anecdotal evidence that we have been hearing for some time. Not only are approvals below longer-term averages but they have fallen for seven out of the past eight months. And the downturn is not just limited to home building with the value of commercial construction loans sliding by just shy of 60 per cent on a year ago. All areas of the construction sector would be rightly worried about the outlook.
The rate hikes have certainly taken their toll on the housing sector over the past year and unfortunately for the sector it is unlikely that a turnaround is going to take place anytime soon – especially given the double whammy rate hike in November is yet to make its mark on the data.
While approvals to build new homes may be sliding one area that has picked up pace is the renovation market. In smoothed terms the value of alterations and additions rose to a record high of almost $560 million in November. Whether it is higher home prices or the cost of building or development that is driving the increase, people seem to be electing to renovate rather than move.

Interestingly when you look across the states Victoria continues to outshine the rest. In annual terms approvals in Victoria are still up 4 per cent on a year ago, compared with the likes of NSW, Queensland, South Australia and Tasmania which have recorded double digit losses. The strength in construction activity in Victoria has provided a healthy degree of support for the state economy over the past year.
While interest rate rises have been the driver for the weaker activity levels, state, federal and local governments need to share part of the blame. In states like NSW, costs for developers need to be reassessed,
as a degree of under building continues to take place. The sustained slide in rental vacancy rates is a clear indicator of the level of under building.
The data yesterday highlighted the contraction in the manufacturing sector and the story is no different for the service sector. There are a couple of factors driving the weakness in the services sector including higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses.
Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Input costs and wages remain elevated but selling prices are flat. Business margins are constrained, thus depressing profitability.
A period of interest rate stability would clearly help the situation. If the Reserve Bank stayed on the interest rate sidelines over the next couple of months, activity levels should improve.

What do the figures show?

Building Approvals:

New dwelling approvals slumped by 4.2 per cent in November, after rising by 8.3 per cent in October. Dwelling approvals have fallen for seven out of the last eight months and are down 9.9 per cent on levels of a year ago.
House approvals fell by 2.0 per cent in November (private sector down 1.7 per cent), after rising by 1.2 per cent in October. Apartment approvals fell by 7.7 per cent in November (private sector was down 5.5 per cent) after rising by 22.3 per cent in October. In annual terms apartment approvals are up 3.8 per cent on a year ago.
Dwelling approvals fell most in Tasmania (down 15.4 per cent) and NSW (down 13.4 per cent) in November. Approvals improved the most in Western Australia (up 7.1 per cent).
In annual terms approvals across the state: NSW (down 19.4 per cent), Victoria (up 4.9 per cent), Queensland (down 24.6 per cent), South Australia (down 11.6 per cent), Western Australia (down 4.9 per cent),
The value of building approvals fell by 3.5 per cent in November and was lower by 32.5 per cent on a year ago.

Performance of Services index

The Performance of Services index rose modestly from 46.2 to 46.4 in December. It was the tenth time in the past 12 months that the PSI has been below 50. Any reading below 50 indicates a contraction of activity.
The poor performance in services sector activity was largely concentrated in the professional services subsectors. In particular, the activity indices of the property & business services, finance & insurance, and communication services sub-sectors all fell sharply in December.
On the other hand, the activity indices of the services sub-sectors exposed to household spending generally picked up in the month, after falling back in November. The strongest growth was recorded in the wholesale trade, hospitality and personal & recreational services.
Sales, orders and employment all recorded modest improvement but still remained below 50, suggesting weak activity levels in coming months. In fact only input prices and wages have index readings above 50
Profitability is clearly under pressure with the index of selling prices largely unchanged while input prices and wages continue to trend higher.

What is the importance of the economic data?

The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
The Australian Industry Group and Commonwealth Bank release the Performance of Services index each month. The PSI is a key indicator of conditions in the services sector – includes retailing, finance, hotels and cafes.

What are the implications for interest rates and investors?

It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. The fundamental for property remain attractive. Population growth remains healthy, vacancy rates continue to slide and the employment growth will support activity in the mid to longer term.
Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5-8 per cent.

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Dwelling approvals rebound, Credit sluggish

Mon, 29 Nov 2010 23:04:07 +0000

Latest economic data

New dwelling approvals rose for the first time in seven months – up 9.3 per cent in October.
The RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia – reported that home prices rose by 0.3 per cent seasonally adjusted terms in October. House prices outside capital cities eased by 0.1 per cent in the month.
Capital city home prices are up 6.5 per cent on a year ago while prices in the ‘Rest of State’ markets are up just 2.4 per cent.
Private sector credit rose by only 0.1 per cent in October, largely driven by weakness in business credit which fell by 0.8 per cent in the month. Credit growth stands 2.8 per cent higher over the year.
The broad measure of Australia’s external position – the current account – worsened markedly in the September quarter. The current account deficit widened by $2.4 billion to $7.8 billion in the September quarter.
Overall CommSec expects that the economy grew by around 0.5 per cent in the September quarter.

What does it all mean?

The release of five economic indicators has certainly given economists and analysts a lot to ponder. And at first glance the data certainly paints a mixed picture of the Australian economy. House prices and building approvals recorded a healthy rebound, while private sector credit remains sluggish, and the current account deficit widened.
The improvement in building approvals is certainly encouraging but needs to be put in context. Dwelling approvals have slumped by over 30 per cent in the past six months and the latest rebound is mostly all apartment approvals, which tend to be lumpy. A few more months of rising approvals will be needed to claim a turnaround.
Even the rise in property prices is the first in five months. Clearly the interest rate hikes have taken some of the steam out of the housing sector and a consolidation period will remain part of the landscape in the near term. It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5-8 per cent.

Given that all the backward looking data that plugs into the economic growth calculations has now been released, focus will turn to the tomorrows growth result. Overall CommSec expects that growth is likely to be around 0.5 per cent for the quarter – good but not great. The data on Government finances suggest that the public sector added to economic growth in the September quarter but was offset by the slide in net exports which is expected to detract 0.4 percentage points to GDP.
There is no doubt that the domestic economy is limping along at present. Activity has been subdued with consumers keeping a tight rein on spending, while domestic businesses are also feeling the pinch of higher interest rates. In fact the latest data on private sector credit confirms that the business sector remains cautious and unwilling to borrow. Business credit has slumped for four straight months and is down over three per cent on a year ago. Until the conservative mood of Australians changes, the economy will continual to struggle and the Reserve Bank will stay on the interest rate sidelines.

What do the figures show?

Building Approvals:

New dwelling approvals have risen for the first time in seven months, up 9.3 per cent in October. Dwelling approvals are up just 1.2 per cent on levels of a year ago.
House approvals rose by 1.9 per cent in October (private sector up 1.5 per cent), after sliding by 1.2 per cent in September. Apartment approvals rose by 24.5 per cent in October (private sector was up 23.6 per cent) after sliding by 12.7 per cent in September. In annual terms apartment approvals are up 61.6 per cent on a year ago.
The value of building approvals rose by 4.1 per cent in October and was lower by 18.4 per cent on a year ago.

House Prices

The RP Data-Rismark Hedonic Australian Home Value Index rose by 0.3 per cent in seasonally adjusted terms in October, following the 0.1 per cent drop in the previous month. The monthly growth rate peaked in January at 1.7 per cent and has consistently softened since.
House prices rose by 0.7 in the month while apartments rose 0.5 per cent.
Home (dwelling) prices are up 6.5 per cent on a year ago with house prices up 6.4 per cent and apartment prices up 6.8 per cent.
The biggest fall in home prices occurred in Perth (down 1.8 per cent), followed by Brisbane (down 0.2 per cent). Prices rose the most in Canberra (up 1.8 per cent), followed Darwin (up 1.7 per cent), Adelaide (up 0.9 per cent), and Sydney and Melbourne (down 0.6 per cent).
Home prices are higher than a year ago across all capital cities but Perth (down 1.8 per cent) and Brisbane (down 0.7 per cent). Leading the way is Darwin (up 10.8 per cent), followed by Melbourne (10.7 per cent), Canberra (up 9.6 per cent), Sydney (up 8.4 per cent), and Adelaide (up 5.5 per cent).

Private sector credit

Private sector credit (lending) rose by just 0.1 per cent in October after a flat result in September. Credit growth is up 3.3 per cent on a year ago.
Housing credit grew by 0.5 per cent with lending to owner-occupiers up 0.6 per cent and investor housing up 0.5 per cent. Housing credit is up 7.7 per cent on a year ago. Owner occupier housing credit is up 7.5 per cent on a year ago – slowest pace in records going back 20 years. Investor housing lending remained up 8.1 per cent on a year ago – a two year high.
Personal credit rose by 0.2 per cent in October after rising by 0.4 per cent in September. Other personal credit was up 2.4 per cent over the year. Business credit fell again in October, down 0.8 per cent after a similar fall in September. Business credit is down 3.2 per cent on a year ago.

Government Finances
Government consumption spending rose by 0.5 per cent in the September quarter after a 1.8 per cent lift in the June quarter. But public investment was up 1.9 per cent in the September quarter after remaining flat in the June quarter. General government investment rose 1.6 per cent in the quarter while spending by public corporations rose by 2.7 per cent.
Balance of Payments

The broad measure of Australia’s external position – the current account – worsened markedly in the September quarter. The current account deficit widened by $2.4 billion to$7.8 billion in the September quarter. The balance of goods and services moderated from a surplus of $6.6 billion to a surplus of $5.8 billion. And the net income deficit widened by $1.7 billion to a deficit of $13.2 billion.
In the September quarter exports of goods and services fell by 1.2 per cent, outpacing a 0.2 per cent fall in imports.
The trade sector (exports less imports) will detract 0.4 percentage points to economic growth in the September quarter.
The terms of trade (ratio of export prices to import prices) rose by 0.8 per cent to a record high of 108.6 in the September quarter.
Net foreign debt fell by $8.3 billion to $666 billion in the September quarter.

What is the importance of the economic data?

The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database including over 280,000 sales during 2009. Unlike the ABS Index, which excludes terraces, semidetached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.
The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results compare the end of March index with the end of December index.
Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth. Trade has been a drag on economic growth over the past four years with a lack of productive capacity holding back exports while rising incomes have boosted imports.

What are the implications for interest rates and investors?

The Reserve Bank would be well aware that the forward looking data suggests that growth is likely to be subdued in the near term. Interest rates are likely to remain on hold for the next few months, to support investment and activity.
The ongoing boost to the terms of trade will have longer term implications for the domestic economy. Driving up incomes, employment and spending.

Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report.

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Housing slowdown may delay rate hike

Mon, 04 Oct 2010 06:54:51 +0000

Trends in housing

The release of the building approvals and home price data is an opportune time to focus on the latest trends in the housing market. Dwelling approvals, new home sales and home prices all fell again in the
latest month, raising hopes that the Reserve Bank will delay any rate hike for at least a month.
Amongst the key trends: there are fresh doubts about the apparent under-supply of homes in Australia –in fact non-NSW housing approvals were at record highs in the year to August; Victoria is the clear leader in home building while NSW activity is again slipping back towards record lows; home prices have softened in response to a slowdown in demand for property; and buyers are switching from free-standing homes to units and townhouses in many states and territories.
Exacerbating the decline in housing demand has been the shortsighted reduction in migrant numbers by the Federal Government. The slowdown in migrant inflows over the past year has been the biggest ever recorded.

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Weak data raises doubts about imminent rate hike

Thu, 30 Sep 2010 00:10:27 +0000

Latest economic data

The outlook for home builders remains sluggish. New dwelling approvals fell for the fourth time in the past
five months – down by 4.7 per cent in August.
Lending barely grew last month. Private sector credit rose by only 0.1 per cent in August – marking the
slowest growth in nine months. Credit growth stands 3.1 per cent higher over the year.
Employers are looking for new staff again. The number of job vacancies rose by 9.9 per cent to 181,300 in
the three months to August. By industry, the biggest lift in job vacancies was in Accommodation and food
services (up 77.9 per cent) with Healthcare & social assistance up 34.9 per cent.

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