Building approvals data for May 2016 was released earlier this week by the Australian Bureau of Statistics (ABS).  According to the data there were 19,276 dwellings approved for construction over the month.

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The 19,276 approvals in May 2016 the lowest number of monthly approvals in four months.  Despite a monthly fall in approvals, they remain at historically high levels however, they are now -9.1% lower than their all-time high of 21,197 approvals in May 2015.

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Splitting out new approvals between houses and units indicates that there were 9,816 houses and 9,460 units approved for construction in May 2016.  House approvals were 0.2% higher over the month and 1.5% higher year-on-year.  Unit approvals are much more volatile than houses but they have made up an increasing proportion of total approvals over recent years.  Unit approvals fell -10.3% in May and were -17.9% lower year-on-year.

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Looking more closely at house approvals along with unit approvals by type, the above chart shows the significant shift in approvals over recent years.  The proportion of house approvals has dropped markedly over the past eight years or so.  Meanwhile, approvals for townhouses and low-rise units have remained fairly steady, the big shift has been towards an increasing prevalence of high-rise units.  In May 2006, only 9.9% of all dwelling approvals were for high rise units while 70.7% of approvals were for houses.  Fast-forward a decade to May 2016 and 26.4% of approvals were for high-rise units (the proportion did fall quite sharply over the month) and 53.7% of approvals were for houses.  High-rise approvals (and ultimately construction) maximises a development site, provides more homes and is in most instances the highest and best use of a site.

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The above chart shows the proportion of total dwelling approvals that are for high-rise unit projects over time for the major states.  This chart further illustrates the increasing prevalence of high-rise unit development.  The chart also shows how the tide is turning somewhat with relation to high-rise unit approvals with the proportion starting to fall in most states and territories.  Over the past six months, the average proportion of total approvals for high-rise units has been recorded at: 46.6% in NSW, 24.4% in Vic, 30.3% in Qld, 10.1% in SA, 10.8% in WA, 0.0% in Tas, 21.6% in NT and 32.0% in ACT.  If we go back 10 years and look at the 6 month averages they were recorded at: 19.1% in NSW, 5.6% in Vic, 11.4% in Qld, 7.0% in SA, 3.3% in WA, 1.5% in Tas, 22.4% in NT and 17.1% in ACT.

There are inherently many more risks associated with building higher density unit projects.  More pre-sales are required to secure finance in order to commence construction, more things can go wrong during construction of a larger project and settlement can occur several years after the contract is signed when market conditions may be significantly changed from when the project commenced.  The higher risk environment and subsequent diminishment in confidence and tighter lending finance for development is starting to result in a slowing of approvals for high-rise unit projects.  Of course, it should be remembered that an approval doesn’t necessarily translate into a commencement and ultimately an approval.  It is increasingly likely that a larger than normal proportion of the recent high-rise unit approvals will not get built in the short-term.

Dwelling approvals have eased from their record highs of a year ago but on an historic basis remain at very high levels.  We expect that an increasing number of these properties, particularly in the unit segment won’t be built in the current housing market cycle.  With a record high number of units set to settle over the next two years we would anticipate developers and lenders will become more cautious around unit projects.  Especially given that construction costs are reportedly increasing and population growth and transaction volumes are slowing.