Economics & Markets

January construction numbers hit by lower migration and non-residential weakness

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

One of the features of this extraordinary period in our economic history has been the extent to which timing has affected certain indicators. Building approvals, for example fell by 19.4% in January (consensus expectations were for a 2% decline) off the back of a huge rise in December, in which housing approvals reached record highs.

Building approvals are a volatile series even in normal years, and it’s worth noting that despite this weakness in January, they are still up 39% year-on-year.

December’s results were largely due the anticipated withdrawal of the Federal Government’s HomeBuilder package, which was ultimately extended until March, as well as a $10,000 drop in the payment to a total grant of $15,000. It is likely that the January’s poor performance was in turn affected by a fast tracking of applications in order to meet the December deadline.

Units lag detached housing approvals
Within these figures a sharp disparity has emerged between house and unit approvals. In January, detached house approvals were down 12.2%, but still up 38% on last year; unit approvals were down 39.5% - to the lowest level recorded since January 2012 - and also down 22.7% compared to a year ago.

Unit approvals have actually been following a downward trend since the last residential construction boom in late 2017. Demand in semi-detached dwellings is typically reliant on migration, and border closures have acted as a drag on the sector since the beginning of the pandemic. Prior levels of over-building in inner-city apartments across the major capital cities have also contributed to this lacklustre performance.

On the bright side, investor housing finance increased by nearly 10% through January, up 22.7% on a year ago1, which, given that investors own two-thirds of apartment stocks (compared to one-quarter of houses)2 this should bode well for future construction in the sector.

Demand for detached dwelling approvals is likely to remain strong over coming months. HomeBuilder has had a significant influence on new housing construction, and the extension of the program until March should continue to boost new housing demand over the period.

Source: ABS, AMP Capital
Source: ABS, AMP Capital

Non-residential construction remains a concern

Outside of residential activity, news for the construction sector is less positive. Non-residential building approvals fell by 16.3% in January, down by more than 30% over the past twelve months3, which is something of a worrying sign given the need for increased business investment in Australia over the rest of the year.

Uncertainty around the future of office and retail space, along with general uncertainty about the full recovery of the economy, are in all likelihood affecting future investment in the space. However, if the broader economy continues to rebound there should be some expectation for non-residential construction to eventually follow suit.

1 ABS, Lending indicators, January 2021
2 RBA, Proportion of Investment Housing Relative to Owner-Occupied Housing, Submission to the House of Representatives Standing Committee on Economics’ Inquiry into Home Ownership, June 2015
3 ABS, Building Approvals, January 2021: https://www.abs.gov.au/statistics/industry/building-and-construction/building-approvals-australia/jan-2021

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Diana Mousina, Economist - Investment Strategy & Dynamic Markets
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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.

 

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