Construction backlog holds up sector

The Australian Bureau of Statistics released its monthly building approvals data for October 2022 for detached houses and multi-units as well as its construction work done for the September quarter.

The data revealed building approvals fell by 6.0 per cent in the month of October to be 9.0 per cent lower than in the three months to October compared to the same quarter in 2021, while construction work for the quarter rose 2.2 per cent.

Despite the decline in approvals in recent months, the value of non-residential buildings rose 2.6 per cent for the month.

HIA economist, Tom Devitt, said the impact of rate rises that commenced in May 2022 is yet to be felt in the current building approval data.

“Building approvals have been sustained in recent months by the record number of home sales prior to the first increase in the cash rate that still haven’t been approved,” Mr Devitt said.

“Sales in and financing of new homes have fallen significantly in recent months, but this is yet to flow through to the number of homes gaining council approval.

“The full impact of the rate rise will not be observed in approvals data until 2023 when the pool of earlier sales is exhausted.”

Looking across the states, total dwelling approvals fell in NSW by 18.8 per cent, followed by Queensland at 18.7 per cent, and Tasmania dropped 10.5 per cent, while South Australia dropped 17.6 per cent, Victoria (up 5.8 per cent), and Western Australia (5.7 per cent) increased.

AMP’s Diana Mousina said the weakness in approvals over the past year has been in houses mostly due to the “after-effect” of the HomeBuilder grant.

The data revealed house approvals are down by 11.6 per cent on a year ago while apartment/multi-density are up by 3.5 per cent.

“There are broader factors weighing on building approvals and the housing market overall with aggressive interest rate rises and high inflation in building materials,” Ms Mousina said.

“House approvals have more downside to go but apartments/multi-density should do better from new demand as migration is surging again and from government incentives for schemes like Build-to-Rent.”

Construction backlog keeps industry afloat

Indeed, given the construction pressures on the back of supply shortages, cost rises, and weather events, there is a “larger-than-usual” pipeline of approvals and construction work to be completed, Ms Mousina said.

The ABS data showed construction work done in the September quarter rose by 2.2 ($54.7 billion) in the September quarter and building work was up by 1.2 per cent ($30 billion).

New residential building construction increased by 1.3 per cent compared to the previous quarter, but that marked a 5.2 per cent fall year-on-year.

Given this, Ms Mousina said residential investment will be a “small drag on September quarter GDP growth”, but business investment will make a moderate contribution to GDP that is due to be released next Wednesday (7 December).

The data also follows October’s annual inflation data that dropped to 6.9 per cent, from the previous month’s 7.3 per cent, while new dwelling construction prices rose 20.4 per cent in October, considerably higher than the increase for the 12 months to October 2021 that was 5.0 per cent.

CreditorWatch’s chief economist, Anneke Thompson, said the price rises in that sector indicate a “looming shortage of housing” over the next few years as buildings become too expensive to commence.

“That will increase risk for construction companies and the knock on effects are likely to be felt across the industry,” Ms Thompson said.

The Commonwealth Bank of Australia (CBA) economist, Kristina Clifton, added the rising rates and costs are the “biggest headwind to dwelling investment over the coming year”.

“The housing market, including residential construction activity, is generally one of the most interest rate sensitive parts of the economy, Ms Clifton said.

Indeed, variable mortgage interest rates have risen in line with the cash rate and are currently at their highest since mid-2012 and fixed mortgage rates have been moving since before the RBA began lifting rates in the 2022 rate cycle.

“Higher interest rates mean that households cannot borrow as much, all things being equal,” Ms Clifton said.

“We estimate that the interest rate increases to date have lowered borrowing capacity by over 20 per cent.

“Lower borrowing capacity puts downward pressure on dwelling prices. And in turn lower dwelling prices reduce the demand for new dwellings by households and reduces the incentive for developers to build dwelling.”

She added that the falling dwelling prices are likely to remain a clear headwind for new dwelling commencements through H1 2023.

[Related: Softening inflations poses a dilemma for RBA]

Kate Aubrey is the senior content producer of Momentum Media's mortgages titles: The Adviser and Mortgage Business.

Prior to joining Momentum Media, Kate covered regional and breaking news for ABC Radio for more than three years.

She has a Master of Arts in Journalism from the University of Melbourne and a Bachelor of International Business and Business Management from Griffith University.

Email Kate at: This email address is being protected from spambots. You need JavaScript enabled to view it.