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Economics & Markets

Surge in building approvals pave the way for a rebound in residential construction

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney Australia

Residential building approvals give an interesting read on the COVID-19 pandemic, both as a leading indicator of future construction and as a lagging indicator of confidence in the housing market, given the time taken for approvals to come through the pipeline.

After four months of volatility, building approvals rose by 15.4% in September, exceeding consensus expectations of a 1.5% lift. Approvals are above their pre-COVID levels, and 8.8% higher than this time last year.

At a fundamental level, the resurgence depended on approvals for private detached houses, which rose by almost 10%. Private non-detached home approvals rose by almost 24% from a much lower base, having been hit particularly hard through the course of the pandemic. This trend may continue to run out for some time, due to the extent to which COVID-19 is diminishing the premium once demanded for proximity to city centres given many now have the mobility to work from home.

Surprisingly, the Victorian lockdowns appear to not have had a significant impact, with building approvals in that state having risen over the three months to September, although gains in other states were stronger than in Victoria and NSW where disruption from the virus has been most keenly felt.

The slump caused by the pandemic was just another chapter in the decline in housing construction in Australia (and especially apartment construction) since the peak of 2017. Now that the negative effects of the pandemic have worked their way through the system there is scope for the industry to contribute to the broader economic recovery on the back of government stimulus programs such as the HomeBuilder scheme, which provides $25,000 grants for new home construction projects. New home sales have soared since the announcement and anecdotal evidence suggests that take up has been quite high. This is evident in Perth (and Western Australia) where it has benefited from its state-specific housing grants given its the housing industry has suffered since the end of the mining construction boom.

Low immigration headlines future risks for the industry

Whilst the immediate outlook for housing construction looks promising, there are some concerning questions around its longer-term direction in the post-COVID environment. Australia’s international borders don’t look to be reopening at any point in the near future, and the Reserve Bank in its most recent Statement on Monetary Policy1 said that it expects some level of restrictions on international departures and arrivals to persist through to the end of 2020, and potentially beyond.

In the past, net migration has been a significant driver of housing demand, and as long borders are closed, there will be a dampening effect on the industry.

In addition, non-residential construction remains very weak, with September approvals at their lowest point since the start of 2017. Non-residential construction is less sensitive to the low interest rate environment that is driving residential construction, and as a result is likely to take longer to recover from the COVID-19 shock. With around 20-30% of the workforce working from home, demand for new office space will be scant in the short term, and demand other sectors which are impacted by reduced mobility and social distancing, such as construction for accommodation and recreation facilities, is expected to continue to be low.

  • Covid-19
  • Economics & Markets
  • Opinion
  • SMSF News
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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