Council approvals to build new apartments and houses have declined to their lowest level in five years. According to the latest monthly figures released by the Australian Bureau of Statistics, the approvals plunged by 24.7 per cent in the 12 months to December 2018.
Falls in December alone were significant—approvals for private sector dwellings, excluding houses, are down by 8.5 per cent while houses are down by 1.1 per cent.
The sharp declines signal that the apartment boom is slowing in the cooling Sydney and Melbourne markets. Dwelling approvals have been in decline for the third consecutive month, with fears the downturn may have broader impacts on the economy.
The weaker conditions in residential building are partially offset by a strong pipeline of infrastructure projects, particularly in the transport sector, especially in NSW and Victoria.
Number of Factors for Slow-Down
Housing Industry Association (HIA) Chief Economist Tim Reardon believes there are a number of factors contributing to the downturn, but that the market will correct throughout 2019.
The apartment boom is not necessarily over
“The apartment boom is not necessarily over,” he told Jobsite. “For a variety of reasons, we saw apartment approvals down by almost half, but that shouldn’t be too concerning as the long-term average is still high.
“There will be a pause to clear the current built apartments before commencing building at a lower level. There are still many apartments approved but not yet built.”
Mr Reardon also attributed other factors to the decline in approvals including falling house prices, tightening lending conditions, and changes foreign investment.
“In 2018, we saw a confluence of factors contributing to the slow-down in housing approvals. The credit squeeze caused the market to slow much faster than expected, and we expect that to adjust as people realise they can borrow less than they could in the past,” said Reardon.
The credit squeeze caused the market to slow much faster than expected, and we expect that to adjust as people realise they can borrow less than they could in the past,”
Later that year, lending criteria were tightened by the banks. Lending standards were lifted, making it harder to get a home loan, as the Royal Commission into Banking got underway. The net result was that loan approval times blew out from a couple of weeks to a couple of months; more scrutiny was placed on living expenses and the ability to service a mortgage.
In an interview with The New Daily, Property Council CEO Ken Morrison said the worsening availability of finance would hit the sector in 2019 as fallout from the royal commission grew.
“One of the biggest engines of the Australian economy is slowing, hit by tightening access to finance, softening forward work schedules, and a less optimistic view of the economy,” he said.
HIA’s Reardon, however, questioned whether the Royal Commission had any significant bearing on the slump in approvals. “I don’t see the Royal Commission as having a significant impact on the market,” he said. “While it may have accelerated the credit squeeze somewhat, it doesn’t impact on basic supply and demand.
“The Royal Commission may ultimately give borrowers more transparency over their loans, but I don’t think it will impact house prices or supply.”
Reardon also attributed partial blame to changing investment lending conditions, saying, “We have seen punitive rates of tax on foreign investors forcing investors out of the market, coupled with house prices growing below the rate of inflation. They will return once house prices rise.”
Prices Expected to Move Up
Reardon predicted that the market would see an adjustment in the process.
“In 2019, I think prices will move up. In the past four years, the industry has built five years’ supply of houses and a record number of apartments. As approvals decline, we will see reduced supply, causing prices to rise again and bringing the market back up.”