Victoria: the last dwelling construction stronghold

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By Leith van Onselen

With the release last week of Australia’s dwelling approvals data for the March quarter of 2018, it’s once again time to examine how Australia’s dwelling supply is tracking against population growth.

The below charts track the following, which are based on the latest available quarterly data:

  • Dwelling approvals to March 2018;
  • Dwelling commencements to December 2017;
  • Dwelling completions to December 2017;
  • Population change to September 2017; and
  • Net dwelling additions to September 2017.

First, the national picture shows that dwelling approvals have rebounded after falling sharply from recent all-time highs, although commencements continued to fall. After surging recently, completions also fell in the December quarter. Population growth had also accelerated to 396,000 people in the year to September 2017:

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Overall, the dwelling construction boom looks done, although the downturn should be fairly gradual. While the construction pipeline remains large, dwelling completions should soon play catch-up with commencements before peaking. The recent sharp acceleration in population growth (immigration) has also mitigated the potential oversupply risks that were apparent this time last year (before the 2016 revised up population growth), whereas the rebound in approvals means that construction should remain at elevated levels.

Separate data on net dwelling additions – which is arguably the best data to use when assessing actual dwelling supply, since it takes into account demolitions as well as new additions – shows that actual dwelling supply has fallen just as population growth is increasing:

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Next is NSW, where after a decade of sluggish construction, approvals, commencements and completions lifted to unprecedented levels but all have since retraced. However, given completions remain significantly below commencements, it could take another few quarters until they peak. Population growth, by comparison, has accelerated recently and is running at record highs:

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The separate data on net dwelling additions in NSW also shows a worsening shortage, with supply plummeting relative to population growth:

In VIC, which was for a long time the construction leader, both dwelling approvals and commencements have rebounded after retracing from historically high levels, with approvals now at record levels. By contrast, completions turned down in the December quarter after catching-up. Population growth, however, is running near the highest level in Australia’s history at nearly 150,000 people a year:

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The separate data on net dwelling additions in VIC also shows a worsening shortage, with supply plummeting relative to population growth:

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QLD’s apartment glut continues to come online. Dwelling approvals and commencements have fallen sharply from recent highs, although approvals are rebounding. Completions, by comparison, have only just begun to catch-up. However, population growth in QLD is accelerating, albeit running at relatively modest levels compared to the mid-2000s, which should mitigate the oversupply:

The separate data on net dwelling additions in QLD suggests a declining housing surplus, with supply plummeting from high levels at the same time as population growth is rising:

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The construction cycle in WA continues to unwind abruptly. Approvals and commencements are way past their peak and have crashed, whereas completions are following fast. Meanwhile, population growth has also crashed through the floor, despite rebounding over recent quarters, suggesting the supply-demand imbalance in Western Australia will continue to get worse and remain in oversupply for a while yet:

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The separate data on net dwelling additions in WA suggests a continuing housing surplus. Although supply has plummeted from recent highs, population growth remains low:

Finally, SA’s housing market looks to be headed into oversupply, with dwelling approvals and commencements having risen recently as population growth has plummeted, and completions still to catch-up:

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The separate data on net dwelling additions in SA confirms a housing surplus, with strong supply relative to population growth:

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The overall picture hasn’t changed materially. The data suggests that dwelling construction has failed to match population growth in Sydney and Melbourne, but has outrun population growth in the other major markets. The imbalance in Sydney and Melbourne is also likely to worsen given net dwelling additions have plummeted over the past quarter.

Given the bulk of new construction across Sydney and Melbourne has also been in units & apartments (many shoebox high-rise):

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And that these new apartments cannot accommodate nearly as many people per dwelling as the existing stock (which are mostly detached houses), the actual supply situation in these two cities is likely worse than suggested by the raw data above.

The one thing that has changed is that approvals have rocketed over recent quarters in VIC to fresh highs, which could translate into a second-wind construction boom (assuming they transfer into actual construction).

This brings me to Tuesday’s Federal Budget, which forecast that dwelling investment will rebound by 1.5% in 2018-19 and remain flat in 2019-20:

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For mine, this projection by Treasury seems highly optimistic given the above data – a view that is supported by the Housing Industry Association’s latest projections of ongoing falls in dwelling starts:

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.