This week we take a look at whether the residential construction sector (building of new houses and apartments) is recovering or is it stuck in the doldrums? There are three sources of statistics we can use from the Australian Bureau of Statistics (ABS). These are building approvals, housing finance, and dwelling commencements.

Building approvals are published monthly, usually 5-6 weeks after the month in question. These are based on council approvals of building projects. Approvals data cover both detached houses and non house residential (i.e apartments) projects. Also approvals for non residential construction are included.

As the following chart shows building approvals were badly hit by the GFC but have improved in recent times with house approvals recently approaching the level of periods of strongest economic growth in the last decade. Notice how overall building approvals were at their highest in mid 2002. Part of this was to do with a recovery from the post GST slump of 2000-2001, with both house and apartment approvals very strong.

Building Approvals 2000-2010

During the boom years of 2005-2008 overall building approvals were at a lower level reflecting a big increase in costs and in house price values that had occurred by then.

Unit approvals are still well down on their decade highs. Whilst the first home owners boost and low interest rates were big factors in increasing the number of new house approvals during 2009, the high cost and shortage of development finance has held the apartment sector back.

A problem with building approvals is that not all approved buildings end up being built. The conversion rate depends on many factors including finance and levels of pre-sales by developers. You need to look at the other measures to get a more complete picture.

By the way, these statistics are all seasonally adjusted i.e. the numbers are manipulated by the ABS for seasonal fluctuations. For example the December quarter would need to be adjusted to account for days lost during the Christmas holiday.

The next set of measurements are housing finance statistics. Housing finance tells us how much money banks approve for lending for the construction of new houses. The number of loans approved for construction of a new house is the  most useful measure. Overall value of loans data is also published, but over time as house values increase this statistic does not give us any indication of how many homes are likely to be built.

Housing Finance 2000-2010

The number of loans for construction of a new house were boosted strongly during 2009 with the First Home Owners Boost. Low interest rates are another factor which drove people to borrow to build. With the end of the Boost and higher interest rates the number of loans has fallen steeply from the peak in October 2009, as shown in the following chart.

The big question is where does housing finance go from here? Will rising interest rates deter new housing loans, or will strong migration and jobs growth push housing loans back up again? Like building approvals, housing finance data is also published monthly. Both indices are always of great interest as a barometer of future activity. However neither actually tells us definitively how much construction will occur. It is common for a building approval to be granted but the development does not proceed.  

For more certainty we must turn to dwelling commencements. This tells us the number of dwelling constructions actually started, although unfortunately we can not separate that into houses and apartments. Furthermore the data is published quarterly and takes longer to publish. The latest data is for the December quarter so it is nearly 6 months out of date already. The next set of data (for the March 10 quarter) is due out in June 2010.

As the following chart shows housing commencements have drifted down steadily for much of the decade from 45,000 per quarter to only 31,500 per quarter in 2009.

Dwelling Commencements 2000-2010

The low figures in early 2000-2001 reflected the imposition of GST on new houses. There was a large fall in 2009 with the GFC. Since mid 2009 commencements showed a recovery to around 40,000 per quarter.

So is the housing market recovering? Clearly approvals data shows an improvement in the detached housing market and a slow but lacklustre improvement in the unit sector. Neither sector are back to the peaks experienced between 2002 and 2004. Finance numbers dropped in March 2010 but as the chart shows the number of loans is still comfortably above 2005-2008 levels. With interest rates now close to "neutral" perhaps finance numbers will flatten or fall rather than increase again.

There is considerable regional variation in the data. Victoria is the stand-out performer for approvals with the number of detached housing approvals close to decade highs and apartment approvals above the decade average.

In New South Wales both house and apartment approvals were well below the highs of the last decade but both sectors appear to be turning. New South Wales dwelling construction has been falling steadily since 2002. The bottom appears to have been reached and the data is slowly improving

Both Queensland and WA were worst affected by the GFC in 2009 and approvals for housing and apartments halved after peaking in 2008. Now both states'  data  have turned the corner although Queensland is recovering slowest with apartment approvals still at decade lows.

South Australian data shows a housing sector also impacted by the GFC but recovery is already back to decade averages.

So the housing sector is recovering, but it is tentative and different by region. In some states it is picking itself up off the bottom but in Victoria it is powering ahead. There is some way to go before we reach the levels of housing construction experienced earlier in the decade. Furthermore it is not enough to solve the housing shortage problems.

Underlying housing demand (the number of extra dwellings needed to house the growing population) is estimated at around 190,000 in 2010 according to BIS Shrapnel. For supply to keep up with demand therefore requires around 47,500 housing commencements per quarter. An even higher number of starts is required if the existing housing shortage (estimated at 120,000 by BIS Shrapnel) is to be decreased.

Our short statistical investigation today shows that although the housing sector is recovering, Australia is falling further behind whether you look at current approvals (14,000 per month), finance (6000 per month) or commencements (40,000 per quarter).

By Gary Emmett