The nation’s building approval slide has continued despite demand for residential development continuing to rise with one segment of the market recording a double-digit fall.
The Australian Bureau of Statistics said approvals were down 9 per cent in November 2022, marking an acceleration of the downward trend.
Approval rates have fallen 21.7 per cent since August 2022, and the decline seems set to continue, according to Maree Kilroy, senior economist for BIS Oxford Economics.
“The landscape for developers at the moment is not the best, it’s a negative backdrop for them,” she told The Urban Developer.
“There are pretty weak off-the-plan pre-sales which we haven’t seen budge from the low level they have been at for the past two years. There are increased land costs, increased build costs, in some cases by double digits, and then there’s financing.
“While the demand profile should be strengthening with the return of overseas migration, the projects aren’t financially feasible to go ahead with.
“Developers should brace themselves for some challenging years, although there are some potential areas of growth and improvement.”
The data on home approvals was a “weaker than expected result”, particularly for private attached homes, Kilroy said, which includes apartments as well as townhouses and semi-detached houses.
Approvals for this sector of the market dropped 22.7 per cent compared to detached private sector houses, which fell by 2.5 per cent.
The value of total building approvals fell 1.5 per cent in November, up on the previous month’s 0.4 per cent decline.
Real Estate Institute of Australia president Hayden Groves said that the latest figures were no surprise.
“The current economic conditions of high inflation and rising interest rates generally speaking does translate into poorer construction activity outcomes,” he said.
“Throw on top of that the savage shortage of trade and materials supply—that further exacerbates the issue.”
The disparity between multi-residential builds and detached homes came down to construction costs, approval time and uncertainty around the build process, he said.
“There’s a lot of uncertainty around whether developers can find a building partner for their project that they are confident will still be there at the end of the project, because we have seen some big players go under.”
Building approvals: November 2007-2022
^ Source: Australian Bureau of Statistics
REIA WA director Damian Collins agreed that cost escalation was a major issue, in addition to to added pressures from the changing job market.
“To varying degrees around the country we have a market where residential vacancy rates are at or near record lows, and at the same time sectors are clamouring for labour and for people to come here to fill those vacant positions,” Collins, who is Westbridge Funds Management chairman, said.
“We will have a serious challenge in providing accommodation but it's a multi year turnaround, whether it’s an apartment building or a single house, it can be years from concept to delivery.”
This supply-demand delay will see approvals continue to decline in 2023, he predicted.
With the exception of Tasmania and South Australia, which have experienced significant growth albeit from lower bases, the picture was relatively bleak in terms of approval rates with New South Wales down 18.4 per cent, WA down 17.5 per cent,Victoria -12.7 per cent and Queensland -5.6 per cent.
Tasmania, however, had a 75.7 per cent increase in approvals, and South Australia also recorded a respectable 10.0 per cent rise.
Approvals for private sector houses fell in all states except NSW, where it rose 1.2 per cent for the month.
The figures highlight the state-specific construction environment. Western Australia, for instance, has seen an influx of new arrivals, and added pressure on an already constricted housing market.
“Approvals are down significantly in WA. For the month there were 1061 approvals. In the peak when we had all the grants floating around approvals were around 2500 a month,” Collins said.
“It is only twice in the seasonably adjusted numbers that WA has been below 1000 in 40 years. We’re at a critical shortage driven by the lengthy delays and cost escalations during the past 12 months.
“The lack of building approvals will keep pressure on prices and rents and I expect, that despite the national downturn in house prices, that WA will increase moderately in 2023.”
While the outlook might appear challenging, Groves said that there was reason to be optimistic in the longer term.
“We expect it will recover throughout 2023, once we see inflation get under control, particularly in relation to building materials, and we get some immigration starting up, more skilled labour in the construction sector coming into the country—that will help shore up some of supply shortages in that part of the market,” he said.
“It will remain challenging for commencements, and approvals, but it will start to loosen as the year progresses as we get more labour availability and inflation gets under control, and material costs start to come down.
“That last one is still the challenge, and may still prevail for a bit longer.”