Approvals V Construction

Hotspotting

Two very different headlines have summed up the problems for Australia’s ongoing housing shortage.

One of the recent media headlines declared that building approvals were at a two-year high and that things were improving for the nation’s housing shortage.

The other described why building approvals are almost irrelevant – it said that project deferrals are occurring at a record rate.

The reality of the current crisis is this: it doesn’t matter how many houses and apartments are approved for construction – and it doesn’t matter how many re-zonings state governments push through or what incentives they hand out to first-home buyers.

Most real estate developments are not proceeding because they’re not financially viable.

One of those media headlines read: Building approvals hit two-year high as apartment construction surges.

This was incorrect - apartment construction is not surging – approvals are, but many projects are simply not being built because they’re not viable in the current environment.

It’s so expensive to build that the end price for the dwellings would be far too high for most buyers – and therefore not financially feasible.

In October, Australian dwelling approvals reached their highest level in 22 months - with nearly 15,000 new homes approved for construction during the month.

ABS data showed total dwelling approvals rose 4.2 per cent for the month, with approvals for apartments and townhouses jumping 25 per cent to over 5,800 units, the highest since May 2023 – but private house approvals fell 5.2 per cent.

The AFR showed a startling lack of understanding of the problems in the industry when it declared in a headline: Worst has passed for new home building

The article said: “The worst has passed for Australia’s medium- and high-rise housing sector, economists said on Monday, after a jump in approvals of new apartments, townhouses and semi-detached homes.”

KPMG urban economist Terry Rawnsley said:

“The bad times are starting to end … Even with interest rates being unchanged for the year, they still have that confidence that if they can get a project out of the ground they’ll be able to sell it at a profit.”

But that, we think, was rather naïve – and others were less optimistic.

The Property Council of Australia pointed out that apartment approvals were still at half their level of the development boom under way in FY2018.

And Oxford Economics Australia senior economist Maree Kilroy said: “While the latest approval result for apartments was positive, we continue to expect a materially higher dropout rate to commencement.”

In other words, many approvals would not translate into construction. She referred to utility connection bottlenecks and trade labour shortages as problems in the sector.

Matthew Kandelaars of the Property Council said:

“We need to get back to the construction levels seen nearly 10 years ago. We are now six months into the National Housing Accord’s ambitious target of delivering 1.2 million new homes and we cannot allow the target to slowly fade into the background over the next 4½ years.”

According to a new report, money is still flowing into the construction industry but more and more of it is being dedicated to renovating.

KPMG released analysis of spending in the residential construction sector, revealing that while spending on renovations has boomed over the past five years, new residential construction on a per-capita basis has hit a low not seen since 1988.

Over the past five years, spending on new home building has dropped 14 per cent, adjusted for inflation. By comparison, the amount of funding flowing into renovations has increased by 6.5 per cent.

KPMG said:

“For every nail hammered and brick laid in residential construction, 40 per cent of it is going into renovating a pre-existing home.”

So the underlying problem remains. Regardless of how many dwellings are approved, far too few are proceeding to construction – so the fundamental shortage continues and there will continue to be upward pressure on prices and rents.