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Dwelling approvals data for November released by the Australian Bureau of Statistics (ABS) earlier today showed that the Reserve Bank (RBA) are getting their wish. With interest rates low and mining investment topping out, the RBA were looking to the housing sector to pick up some of the slack and that is exactly what it has done.
Dwelling approvals data showed that in November 2013, 16,396 approvals were granted which was a fall of -1.5% over the month however, compared to approvals in November 2012, approvals were 22.2% higher this year. Breaking the data down further, house approvals rose by 5.7% in November and are 17.4% higher year-on-year compared to an -8.8% monthly fall in unit approvals and a 28.5% increase in unit approvals year-on-year.
The private sector accounts for the majority of dwelling approvals, 98.3% in November 2013. Year-on-year, private sector house approvals have increased by 18.0% and private sector unit approvals have increased by 27.6%. As you can see from the above chart, both private sector house and unit approvals are showing a clear trend towards an increasing number of approvals.
The month-to-month data can be notoriously volatile however, if we look at the rolling annual number of dwelling approvals once again we can see that there is a clear trend towards a higher number of approvals. Over the 12 months to November 2013, there have been 173,869 dwellings approved for construction, of which 97.9% were approvals to the private sector. The 173,869 approvals was the highest annual number since March 2011 and were 14.5% higher than at the same time in 2012.
It is also interesting to note the rising prevalence of ‘other’ or unit approvals. Looking at a rolling annual proportion, over the 12 months to November 2013, 43.7 per cent of all dwelling approvals were for units. This indicates that the majority of approvals are still granted to houses however, the 43.7% figure was the greatest proportion of unit approvals on record. It is also interesting to see just how quickly they are rising in prominence, five years ago just 32.7% of all approvals were for units and ten years ago the proportion of unit approvals was 33.0%.
The sharp rise in unit approvals is most likely a response to the relatively more affordable nature of units as opposed to houses as well as a desire by many Governments to increase densities within cities, particularly within inner city areas where many residents desire to live. The above chart details the pricing differential between houses and units across Australian capital cities as at December 2013. You can see in all cities units are selling at cheaper prices than houses and in Sydney, Darwin, Melbourne and Canberra the differential is in excess of $100,000.
The dwelling approvals data breaks approval types down by capital city and you can see that particularly in those cities with a large pricing differential between houses and units the proportion of units approved over the past 12 months is much greater. No doubt this is a trend which is likely to continue given urban growth boundaries and natural geographic boundaries prevalent across most capital cities. Not to mention the fact that outer suburbs may be less desirable despite generally being more affordable due to the generally poor provision of essential infrastructure in these areas.
Overall the data indicates that there has been a sharp supply-side response over the past 12 to 18 months which is exactly the sort of response the RBA would have hoped to see. Over the coming months it will be interesting to see whether or not the pick-up continues. Glenn Stevens famously states that the RBA wanted a supply-side response to low interest rates not just higher home prices, at the moment they are getting both. Over the 12 months to November dwelling approvals have increased by 22.2% however over the 12 months to December 2013 home values have increased by 9.8% according to the RP Data-Rismark Home Value Index. From here it will be interesting to see how strong home values growth is in 2014 and if it starts to slow what, if any, impact will it have in the current pick-up in dwelling approvals.
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