Data deconstructs housing market fallacies

Building approvals show a rise driven primarily by high density housing. But the data is volatile and shouldn't be mistaken for a sign of a bubble.

Building approvals picked up in September and are set to boost residential construction in 2014. Data also indicated that low interest rates are yet to result in reckless lending behaviour by households.

Building approvals rose by 14.4 per cent in September, to be 18.6 per cent higher over the year. Market expectations were for a rise of 2.8 per cent. The result continued a recent period of strength for approvals, with average approvals in the September quarter around 11 per cent higher than the average in the first half of 2013.

Approvals for detached housing rose by only 1.5 per cent in the month, to be 0.5 per cent higher over the year. Almost all of the growth in approvals over the past year has been due to the rise in approvals for higher density housing.

Growth has been largely concentrated in New South Wales and Victoria, which account for about 80 per cent of the national rise in approvals over the past three months. There must be a risk that this level of growth in those two states is unsustainable.

Higher density living is increasingly a feature of modern housing in Melbourne and Sydney. In Melbourne, detached housing as a share of total building approvals has declined from 74 per cent in October 2009 to just 56 per cent in September 2013. In Sydney, detached housing makes up just 45 per cent of annual building approvals.

Graph for Data deconstructs housing market fallacies

One factor boosting the outlook for residential construction is that interest rates affect construction with a six to nine-month lag. As a result, the 25 basis point cuts in May and August are yet to stimulate growth in construction.

Low lending rates have pushed housing loan approvals to their highest level since the First Home Owners Boost was wound back in October 2009. If low interest rates were not enough, investors and buyers are being tempted by relatively high rental yields and expectations of house prices rises. The outlook for residential construction appears pretty bright for 2014.

I wrote last week on why I did not feel there was a housing bubble (Busting the housing bubble myth, October 25) but some will view the rise in building approvals as further evidence that something is not quite right. However, I would recommend that our readers look through the volatility.

The growth in building approvals has been driven almost entirely by high density housing, which can be volatile on a monthly basis. Approvals for high density housing tend to fluctuate around big projects being approved. As a result, don’t be surprised if high density housing approvals decreased in October.

In other housing news, the RBA also released its financial aggregates for September, providing information on lending to households and businesses. Housing credit rose by 0.4 per cent in September, consistent with recent trends, to be 4.2 per cent higher over the year.

There has been a lot of concern recently about low interest rates fuelling a credit-driven housing bubble. To date this has yet to eventuate, with outstanding credit to investors rising by 6.1 per cent over the year and outstanding credit to owner-occupiers increasing by 4.2 per cent over the year. Both results are broadly in line with gross disposable income growth over the past year. 

Graph for Data deconstructs housing market fallacies

The graph above is key for those concerned about a housing bubble. While it does not include foreign investors or domestic investors borrowing from abroad, it captures a vast majority of housing credit. Unless this measure and loan approvals begin to pick up rapidly, particularly with regards to investors, the talk of a housing bubble will be fairly misplaced.

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