The Australian building activity figures released last week showed that in the face of a massive decline in engineering construction, building work is growing steadily – if not enough to make up for the decline of work in the mining sector. The figures also show that by far the biggest residential building growth is in apartments and other units.
Such growth does generate concerns about oversupply, but thus far, especially in Melbourne, dwelling prices continue to grow and the building of apartments continues to soar.
Residential construction is consistently larger than non-residential building work, but while non-residential building remains just above its pre-GFC level, residential building is well above – 18% higher in March 2015 than it was in September 2008.
But residential building activity is of a different type to that prior to the GFC, one that suggests a rather different type of living in the future for Australians in the major cities – especially Melbourne and Sydney.
For the 40 years since the ABS began collecting data on building activity of houses and other residential building, such as apartments and flats, the level of spending on houses has been about three times that of non-house residences. The ratio fell in the 1990s and early 2000s, but just before the GFC, due to a drop in building of apartments, spending on houses was back up to 2.5 times that of non-houses:
But in March this year the value of house building was just 1.46 times that of apartments, flats and other homes.
And the change isn’t due to a decline in house building. While there was a fall in house construction after 2010, and before the interest rate cuts at the end of 2011 kicked in, in March this year spending on houses was 17.3% above what it was in the September 2013 quarter. But spending on non-house residential buildings was 24.2% higher:
And while this is not unexpected, given the recent housing boom has been largely driven by investors, it would be wrong to think it was all about Sydney. Melbourne has seen a stunning increase in the construction of apartments and other non-house residences since 2008, and a massive upturn in the past 12 months:
From March 2014 to March this year, non-house building activity grew 6% in NSW, but a jaw-dropping 22% in Victoria.
And the big difference is that building of non-houses and houses in NSW is usually in synch – even if during this boom the house building has fallen a bit behind that of apartments and flats:
But in Victoria a stark change has occurred. In the March quarter, in trend terms, building started on 8,123 new apartments/flats, etc. In seasonally-adjusted terms, it was 9,009.
Either way, both were records and both were for the first time effectively equal with the commencement of new -house building:
This is a massive shift in housing in Melbourne. In March 2010, work started on a record 10,146 new houses while in that quarter just 4,715 non-house residential buildings began construction.
Five years on the number of new houses started has dropped 18.5% while the number of apartments, flats, etc. has risen 72.3%.
The ratio of houses to non-house building begun in Victoria is now much more aligned with that in NSW than it has ever been.
The boom of apartments has also occurred in Brisbane and parts of Queensland, with the number of housing commencements in March only barely above that of apartments:
All of this new building of course brings with it concerns about oversupply and a possible bubble. Certainly the Reserve Bank has been aware of such concerns. In its March financial stability review it noted “a risk of oversupply in some regions, particularly in the inner-city areas of Melbourne and Brisbane”.
It further noted that “the risk of oversupply appears most evident in inner-city Melbourne, where the level of high-rise apartment construction has been elevated for a number of years”.
It also relayed that “banks and other firms have conveyed” to the RBA “some concern about possible future oversupply” in the Brisbane market.
For the moment these concerns look to be unheeded.
While approvals of apartments does not perfectly align with actual construction (Sydney for example always has more approved but not yet built apartments than it does houses), the number of approved apartments not yet commenced continues to grow strongly in Victoria to record levels:
The massive surge in the supply of apartments is not dimming the growth in house prices in Melbourne, and the rental vacancy rate also remains steady – suggesting that there is little sense currently of oversupply.
The shift towards higher-density housing in Melbourne, but nationally as well, does suggest a different landscape in our cities and inner suburbs – where apartment living becomes more of the norm.
