Building approvals rose to their highest level in history during March, providing further evidence that the residential construction boom is set to be larger and more persistent than previously thought.
The boom continues to be centred around high-rise apartment buildings. The Melbourne and Sydney skylines are awash with cranes, highlighting the recent rise in residential construction, while today’s data provide clear evidence that more is on its way.
The construction boom has been an interesting beast to watch unfold. There was the initial spike, which got most analysts pretty excited, but then activity eased, suggesting that the boom would be short and sweet and generally smaller than earlier construction booms.
The past six months have squashed that view, as well as my assessment that the construction boom would offer little in the way of support for the Australian economy once mining investment collapsed.
Until recently, the current boom appeared to be similar in scope and size to the 2010-11 boom. Now it appears to have similar characteristics to the double-peaked boom in the late 1990s.
But it’s important to keep this in perspective: new residential construction accounted for just 3.2 per cent of real GDP in the March quarter and, even with the recent pick-up in building approvals, it is unlikely to reach 4 per cent before the boom begins to ease.
Residential construction is unfortunately a relatively small part of the Australian economy and nowhere near big enough to offset mining investment without a healthy and vibrant household and non-mining sector.
Questions remain about the employment response. Constructing units tends to be less labour-intensive than building houses, and we are obviously dealing with approvals rather than actual realised construction, so there is a risk that some of these projects just don’t go ahead.
A construction boom driven by high-rise apartments will also take longer to evolve and therefore the employment response will be spread out over a longer period. The month-to-month rise in employment may be weaker than during previous construction cycles, but the boost to employment should prove to be more persistent.
On both a trend and seasonally adjusted basis, new building approvals reached a record high in March. Approvals are up 18.2 per cent over the year on a trend basis -- driven entirely by the higher-density apartment sector.
We are currently in the midst of what is a clear shift in the urban composition of our two largest cities. Whether a reflection of elevated prices or changing preferences, a country once characterised by its suburban sprawl has now, it seems, embraced the shoebox apartments that dominate the city skylines of Melbourne and Sydney.
On a trend basis, approvals for private units rose by 3.6 per cent in March and is now 44 per cent higher over the year. By comparison, the number of approvals for detached housing rose by 0.2 per cent in the month, to be unchanged over the past year.
The higher-density component now accounts for over half of all building approvals, easily the highest level in history, and it appears likely that this will rise further in the near term. There is an obvious risk of an overbuild -- particularly given the long lead times associated with these high-rise projects -- and the construction sector is also set to become less predictable given the high level of volatility associated with the higher-density sector.
As a result, it is awfully difficult to estimate when building approvals will peak. But it is likely that the peak will be sudden and the drop-off severe due to the volatile nature of the data involved. There are, quite simply, only so many high-rise buildings that can be built at any one time.
At least for now, the most important point is that residential construction is one of the few genuine bright spots in an otherwise patchy economy. It’s an important -- albeit small -- part of the rebalancing process and hopefully it will persist until the non-mining sector is better placed to support the broader economy.