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Housing construction has surged through 2021, continuing to outperform the broader economy despite COVID lockdowns interrupting construction in both Sydney and Melbourne. It’s also despite the fact that population growth (which drives the need for additional housing) has flat-lined.
In fact, the rebound in spending on building new homes and renovations means that housing construction activity has grown more than government spending through the pandemic to date, despite the unprecedented government expenditure since early 2020. This is due to record low interest rates, government incentives and perhaps more time during lockdowns to plan home renovations. At the same time, supply chain disruptions have been causing delays in the delivery of some materials, and so the current construction peak may be relatively lower but more extended than previous cyclical peaks.
This means a solid pipeline of residential construction work remains going into 2022. However, with the effects of government stimulus fading and the reality of lower population growth kicking in, there is still every chance that residential construction activity wanes over the course of 2022 and 2023. The RBA might seal that deal once it starts the process of lifting interest rates (though that may still not be until 2023).
In October, Australia recorded a 12.9% decline in residential building approvals, continuing the recent downward trend in this leading indicator of housing construction activity. Nationally, residential approvals are now 32.4% below their peak in March 2021.
Focusing on detached housing, there has been little divergence between locked down states and non-locked down states for approvals in recent months, with the gap between these markets returning approximately to pre-COVID levels. (Chart 1).
Chart 1: Private sector housing dwelling approvals
Source: ABS Building Approvals
There has been some deviation in the more volatile non-housing dwelling (e.g. units) approvals market, with locked down states experiencing a larger decline in approvals since the Delta lockdowns (and particularly in October), although approvals in NSW and Victoria have also fluctuated greatly (Chart 2).
Chart 2: Private sector non-housing dwelling approvals
Source: ABS Building Approvals
New building activity has been spurred on by house price growth. CoreLogic data shows housing prices have increased for the 14th consecutive month, but the rate of that increase has dampened in recent months, with November (national 1.3% monthly price growth) being the softest increase since January. Yet, annual house price growth still comes in at 22.2%.
Capital city trends are showing greater diversity, with Brisbane and Adelaide now recording the fastest pace of growth, while conditions across Sydney and Melbourne slowed more sharply. Demand in the smaller capital cities has been fuelled by fewer disruptions from COVID lockdowns and increased net interstate migration (largely from Sydney and Melbourne).
A more recent feature of the Australian housing market has been an investor resurgence. NSW and Victorian investor loan commitments have stabilised over the Delta lockdowns after big increases in late 2020 and early 2021. Investor loan commitments in other states, in particular Queensland, have generally continued to increase strongly.
The rising investor share comes at the expense of first home buyers, many of whom are being priced out of the market. New loan commitments for first home buyers are down from an historical peak in January 2021, however it is worth noting that first home buyer activity is still above pre-pandemic levels – supported by the large increase in household savings prompted by the harder lockdowns.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.