It doesn’t seem that long ago we were talking about an oversupply of apartments across Sydney, South Melbourne, and Brisbane. However, a lot has changed in the past few years. The ABS October figures on building approvals show a seasonally adjusted estimate for total dwelling units falling by 8.1% in October. The graph below from the October ’19 ABS figures paints a vivid picture of what’s been happening to approvals since 2018.
(Source: ABS 8731.0 – Building Approvals, Australia, Oct 2019)
The lag between rate cuts and building approvals grows ever
larger and ANZ are claiming a potential future housing shortage. ANZ senior
economist Felicity Emmett sees vacancy rates declining over 2020 and 2021 with
approvals not picking up until mid-2020.
It sounds as though ANZ are not quite out on a limb, given
that the Reserve Bank deputy governor Guy Debelle in fact considers a shortfall
in housing supply as “quite likely,” with the end result being a “larger price
response” in property values.
He further stated that “While the increase in supply
has finally met the earlier increase in demand, demand will continue to grow
given population growth, but supply is going to decline. So, there is quite
likely to be a shortfall again in the foreseeable future.”
Higher density construction is subject to longer lead times,
so the supply response is always going to be slow. This further exacerbates any
potential supply issues on the horizon.
Construction activity has a solid impact on GDP and the CBA
estimates that the full downturn would cost the economy 1.4 percentage points
worth of overall growth.
The effect of tighter lending standards for developers is surely
part of the puzzle, but it’s mixed in with a weaker demand from would-be
purchasers over the last little while and some of the concerns over the quality
of newly constructed apartments.
It seems that 24 months is a long time in construction and real estate, and the supply and demand fundamentals look to seesawing in the other direction. Along with the Government and RBA, we’ll be watching with keen interest.
Written by Mike Mortlock
Managing Director of MCG Quantity Surveyors