Dwelling investment is set to rise in 2014, but it is hardly the panacea to our economic problems. If we successfully navigate the mining investment cliff, housing will only play a small role.
The number of dwelling approvals fell by 1.5 per cent in November to be 22 per cent higher over the year. The fall follows a 1.6 per cent decline in October, but we shouldn’t view this as a sign of impending weakness: the two modest falls come after a 17 per cent increase in approvals in September.
As such, a few soft months were expected. I’m actually impressed that approvals didn’t drop by more in October and November. Don’t be surprised if they drop again in December but, even if that occurs, they will remain at a fairly high level.
On a trend basis, total dwelling approvals are now at their highest level since September 1994. There are two important factors to note here.
First, on a population-adjusted basis approvals are nowhere near their peak. The population is now much higher than it was during these previous building approval peaks. Growth is certainly strong, but we should recognise that building approvals are coming off an incredibly low base.
Second, we are witnessing a society shift towards higher-density living. Presumably this is being driven by high land prices, the limited supply of land in ideal locations and public transport systems that are failing to connect outer suburbs to key businesses districts.
High density approvals fell by 8.8 per cent in November but are still almost 30 per cent higher over the year. As the graph above shows, it is clearly the driver of the recent pick up in approvals and is easily at its highest level in history.
Approvals for detached housing actually rose by 5.7 per cent in November, a surprisingly strong result, to be 17.4 per cent higher over the year. I would caution readers not to place too much weight on that outcome given the monthly volatility. I expect this category to decline in December following this unusually large rise.
At the state level, there has been increased activity across all states. Approvals in most states are at fairly high levels based on activity over the past decade. But as I mentioned earlier, after adjusting for population growth, building approvals in all states remain well below their historical highs.
The improvement in building approvals will eventually feed into residential investment but to date that hasn’t occurred yet. Private new residential investment remains at a fairly subdued level.
Dwelling investment is one of the big hopes for the Australian economy in 2014, but as the graph below shows there isn’t a huge amount of upside for dwelling investment. Since 1990, it peaked at 3.8 per cent in the run up to the implementation of the GST.
As I mentioned yesterday (A fast to follow the spending binge?, January 9), I am fairly pessimistic about the ability of consumption and dwelling investment to offset the inevitable and sharp decline in mining investment. Conservative estimates suggest that there will be a 3 per cent of GDP gap that needs to be filled but it will likely be much higher.
As the graph above indicates, it is unlikely that dwelling investment will fill much of the gap, particularly given that so much of the growth is being driven by much cheaper, higher-density housing. In a best case scenario, dwelling investment may rise by a single percentage point as a share of real GDP.
I hope I’m wrong on this. Australia needs a residential investment boom. We need more houses and units, we need the government to release more land and the public transport system to support more outer city living. But that isn’t the case right now, and people who have tied the hopes of the economy on the housing industry will probably end up being disappointed.
Despite falling in October and November, dwelling investment is growing at a strong pace and will support the Australian economy into 2014. But most of that growth has been in the cheaper and less labour-intensive high-density sector.
If Australia is to successfully navigate the mining investment cliff it will require strong growth not only in dwelling investment, but also in consumption and exports and even then it may not prove enough to push the economy towards trend growth.