Record house and renovation approvals

Construction activity hits 3½-year high
Building approvals; Construction gauge; Services activity; Residential land

Dwelling approvals: Council approvals to build new homes rose by 10.9 per cent in December to 33-month highs of 19,537 units (consensus: +3.0 per cent). Private-sector house approvals rose by 15.8 per cent – the most in 23 years – to a record high 13,638 units (highest since January 1979).

Record renovations: The value of alterations & additions approved were up by 8.1 per cent in December to a record $941.6 million.

Construction sector: The Australian Industry Group (AiGroup) Performance of Construction Index (PCI) rose by 2.3 points to a 3½-year high of 57.6 in January. Readings above 50 indicates an expansion of activity.

Purchasing managers’ indexes (PMI): The ‘final’ IHS Markit services purchasing manager index fell from 57.0 to 55.6 in January. The composite index, which measures combined services and manufacturing output, eased from 56.6 to 55.9 in January. Readings above 50 indicates an expansion of activity.

Residential land: Yesterday the Housing Industry Association (HIA) reported that demand for residential land jumped by 27.7 per cent in the September 2020 quarter to be 62.7 per cent higher than at the same time last year.

The building approvals and lending finance data has implications for banks, retailers, developers, building and building material companies. The Performance of Construction index provides insights for business conditions in the sector. The ‘flash’ purchasing manager index gives a guide to conditions in manufacturing and services sectors.

What does it all mean?

· Australia’s building industry is bouncing-back after a two-year downturn. The slump in construction activity – which saw the AiGroup Performance of Construction index contract for 25 successive months – ended in October 2020. The construction gauge hit a 3½-year high at the beginning of 2021. The activity index for housing hit a record high in November with new orders for detached houses at record highs in January.

· The good news also extended to commercial building with the sub-index reaching its highest level in 2½ years in January. New orders and selling price indexes also hit 2½-year highs – implying that construction activity will remain buoyant in the near-term, enabling cost increases to be passed on to consumers.

· Council approvals to build new private detached houses are at all-time highs, driven by record consents in Victoria, South Australia and Western Australia. And the value of alterations & additions approved reached a record $941.6 million in December, boosting activity for tradespeople and building material suppliers.

· New home sales also soared to record levels in December and data from the Commonwealth Treasury showed that there were 75,143 applicants for the HomeBuilder grant at the end of December. Given the strong demand, building approvals – a leading indicator of new home building – surged in the month with total approvals up by a remarkable 22.8 per cent from a year ago.

· And yesterday the Housing Association Industry (HIA) reported that, “Demand for residential land jumped by 27.7 per cent in the September 2020 quarter to be 62.7 per cent higher than at the same time last year.” Demand for affordable detached houses with a backyard – especially in regional Australia – is incredibly strong.

· So what’s driving the frenzy in both residential and commercial building activity? Record-low interest rates; high saving rates; stronger demand for detached houses in regional Australia; the HomeBuilder scheme, stamp duty concessions; the extension of the first home loan deposit scheme; easier bank finance approvals; pent-up demand after Covid-19 related restrictions; and new government tenders coming to market. And the AiGroup economists said, “high iron ore prices are supporting mining engineering works.”

What do you need to know?

Building Approvals – December 2020

· Council approvals to build new homes rose by 10.9 per cent to 33-month highs of 19,537 units in December. Approvals are up 22.8 per cent on a year ago – the strongest annual growth rate in 3 years.

· House approvals rose by 14.9 per cent – the biggest lift in 19½ years – to a record high (highest since July 1983) of 13,785 units in December.

· Private-sector house approvals rose by 15.8 per cent – the most in 23 years – to a record high 13,638 units (since January 1979). But public sector house approvals fell 35.0 per cent in December to just 147 units.

· Apartment approvals rose by 2.5 per cent to 5,752 units in December.

· Over the past year 184,659 new homes were approved, an 18-month high.

· Dwelling approvals across states in December: NSW (+1.8 per cent); Victoria (+8.6 per cent); Queensland (+24.0 per cent); South Australia (+16.7 per cent); Western Australia (+7.8 per cent); Tasmania (+66.5 per cent).

· The value of all commercial and residential building approvals rose by 4.9 per cent in December after falling by 8.0 per cent in November. Total residential approvals rose by 2.3 per cent with new building up 1.4 per cent and alterations & additions up by 8.1 per cent to a record high $941.6 million. Commercial building lifted 10.1 per cent after falling 27.7 per cent in November.

Performance of Construction index (PCI) – January 2021

· The Australian Industry Group (AiGroup) Performance of Construction Index (PCI) rose by 2.3 points to a 3½-year high of 57.6 in January. Readings above 50 indicates an expansion of activity.

· Overall construction activity rose by 2.1 points to 57.4; new orders were up 6.9 points to 58.6 (2½-year high); selling prices rose 7.2 points to 58.7 (2½-year high); average wages lifted 1.1 points to 60.3 (13-month high); but employment was down 0.6 points to 57.0.

· Activity in three out of four construction sectors lifted: Apartment building rose 4.6 points to 45.5; house building fell 1.7 points to 65.3; engineering construction was steady at 53.3; commercial construction lifted 9.7 points to 62.5 (2½-year high).

· According to the AiGroup, “Housing construction, renovations, commercial building and engineering construction are now recovering in all states due to Government assistance, easier access to finance and stronger household spending. The Covid-19 pandemic disrupted all segments of Australian construction. Builders are currently reporting strong demand but are nervous that orders will slow during 2021 as various federal government grants end.”

IHS Markit Purchasing Managers’ indexes (PMI) – January 2021

· The ‘final’ IHS Markit services purchasing manager index fell from 57.0 to 55.6 in January. The composite index, which measures combined services and manufacturing output, eased from 56.6 to 55.9 in January. Readings above 50 indicates an expansion of activity.

· IHS Markit economists reported, “Latest PMI data pointed to a sustained recovery in business conditions in the Australian service sector at the start of 2021. Both activity and new business recorded further strong expansions in January, with firms citing the lifting of interstate restrictions and resumption of projects on hold due to the COVID-19 pandemic.”

· “Companies in the service sector were thus encouraged to increase workforce numbers in the latest survey period, with the latest rise in employment levels the third in succession. Moreover, the increase was the sharpest seen since May 2019.”

· “Business sentiment also remained elevated at the start of the new year, supported by expectations that an improvement in the pandemic situation, particularly lifting international restrictions, would trigger a broad recovery in service sector activity and the wider economy.”

What is the importance of the economic data?

· The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

· The Australian Industry Group compile the Performance of Manufacturing Index, the Performance of Services index and the Performance of Construction index each month (the latter with the Housing Industry of Australia). The Commonwealth Bank and Markit also compile purchasing manager surveys for manufacturing and services sectors. The surveys are amongst the timeliest economic indicators released in Australia. The surveys are useful not just in showing how key sectors are performing but also in providing some sense about where they are headed. The key ‘forward looking’ components are orders and employment.

· IHS Markit undertakes a survey of purchasing managers across manufacturing and services sectors. The ‘flash’ or ‘early/preliminary’ readings provide timely information on the economy. As such, the survey is valuable for investors.

What are the implications for investors?

· Commonwealth Bank (CBA) Group economists expect dwelling investment to make a positive contribution to Australia’s post-pandemic economic recovery in 2021. After falling by an estimated 6.5 per cent in 2020, dwelling investment is expected to climb by 4.5 per cent this year on the back of super-low borrowing costs and the stimulatory HomeBuilder scheme. The lift in home prices – especially stand-alone houses – is encouraging residential property developers to build more housing.

· The flurry of council approvals for new homes and easing of Covid-19 restrictions should have translated into higher dwelling starts in the December quarter, 2020. But the tapering of the HomeBuilder scheme from January 2021, sharp slowdown in population growth – due to border closures – and an oversupplied unit market could see total dwelling commencements fall from around 174,200 in 2020 to 142,400 in 2021, according to CBA Group economists.

Important Information

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Published by Ryan Felsman, Senior Economist, CommSec