Biggest fall in house approvals in 21 years

Building approvals; Construction & services gauges

Building approvals fell by 4.3 per cent in September, but are up 12.8 per cent on a year ago. Approvals to build detached houses dropped 16.1 per cent in September – the biggest monthly decline in 21 years.

The AiGroup & HIA Performance of Construction index rose from 53.3 to 57.6 in October.

The final Australian IHS Markit Services Purchasing Managers’ index (PMI) rose from 45.5 to 51.8 in October.

Building approvals – September

• Council approvals to build new dwellings have declined for five out of the past six months due to the unwind of HomeBuilder stimulus-related housing activity and Delta virus lockdown disruptions.

• Approvals fell by 4.3 per cent in September, but are still up by 12.8 per cent on a year ago.

• In rolling annual terms, dwelling approvals stood at a 3-year high of 231,441 at the end of September, up 30.6 per cent on the year and just 4.9 per cent below all-time highs.

• Approvals to build detached houses dropped 16.1 per cent in September – the biggest monthly decline in 21 years.

• But higher-density apartment approvals lifted 17.4 per cent. In original terms, approvals for detached houses plunged by 19.3 per cent in Greater Melbourne and by 8.4 per cent in Greater Sydney in September. But approvals for dwellings excluding houses soared 114 per cent in Greater Sydney to a 4-year high of 3,291 units.

• Dwelling approvals across states in September: NSW (+27.2 per cent); Victoria (-15.7 per cent); Queensland (-21.5 per cent); South Australia (-22.7 per cent); Western Australia (-20.9 per cent); and Tasmania (-11.8 per cent).

• The value of all commercial and residential building approvals fell by 11.2 per cent in September. Total residential approvals dropped 11.1 per cent with new building down 9.6 per cent and alterations & additions 20 per cent lower – the biggest monthly decline in 8½ years. And commercial building fell by 11.3 per cent.

• Building construction is expected to remain elevated over the next 12 months due to strong home buyer demand. Builders and their contractors are under pressure to deliver projects on-time and on-budget as they work through a huge pipeline of residential, commercial and infrastructure-related construction work. Already construction companies are experiencing skilled trades labour shortages and rising building materials costs due to supply-chain disruptions.

Performance of Construction Index (PCI) – October

• Construction activity was paused at the onset of Delta virus outbreaks in Sydney and Melbourne with the Australian Industry Group (AiGroup) and Housing Industry Association (HIA) Australian Performance of Construction Index (PCI) plunging by 17.1 points in July and August. While building companies re-introduced Covid safe restrictions at worksites after activity resumed, the PCI still surged by 19.2 points in September and October to 5-month highs of 57.6 points. An index above 50 indicates an expansion in activity.

• As mentioned above, we expect construction activity to ramp up over the coming quarters as Delta lockdown restrictions ease.

Purchasing Managers’ indexes (PMIs) – October

• Australia’s post-Delta lockdown economic recovery is underway. Activity in Australia’s services sector expanded in October after three successive months of contraction due to government restrictions. But surveyed business owners in the services sector reported that price pressures were intensifying with input prices rising to a 3-month high amid labour and raw material shortages, supply chain disruptions and port blockages. Of course, rising costs of inputs and production could eventually lead businesses to pass-on these higher costs to consumers through price hikes.

• The final Australian IHS Markit Services Purchasing Managers’ index (PMI) rose from 45.5 in September to 51.8 in October. The final composite PMI (which includes manufacturing activity) rose from 45.5 in September to 52.1 in October. Both readings were at 4-month highs, with indexes above 50 indicating an expansion in activity.

Published by Ryan Felsman, Senior Economist, CommSec