Approvals rise but not expected to last

According to the Australian Bureau of Statistics, building approvals rose by 7.3 per cent in the three months to April 2020 when compared with the previous three months, a relatively positive result despite the outbreak of the COVID-19 pandemic.

However, due to the lengthy process of obtaining new construction approvals, economists anticipate that the true impact of COVID-19 on new construction in Australia won’t be seen for months yet. 

The Housing Industry Association's (HIA) chief economist stated that the most recent ABS data on building approvals “relates to projected lodged with local councils well before the impact of COVID-19 conditions.” 

“Due to the lag between project development and design, submitting an application for a building approval and obtaining an approval, the majority of these projects would have been envisaged at the start of the year or in 2019, when the housing market was gaining momentum,” Mr Reardon said. 

“We do not expect building approvals data to reflect the post-COVID 19 impact until August.”

Shane Oliver, chief economist and head of investment and strategy at AMP Capital, shared a similar sentiment and stated that government stimulus should restart the industry later in the year.

“[B]uilding approvals fell by 1.8 per cent in April, much better than the 10.7 per cent fall expected. This likely reflects lags in processing approvals such that the negative impact of the coronavirus shutdown on approvals is yet to show up but will in the months ahead.  

“Residential construction is expected to keep declining through 2020, but the decline looks like it will be softened by government programs (including a new home building grant) targeted to support new construction.”

According to the data, detached house approvals were 1.5 per cent higher in the three months to April 2020 than those approved in the previous quarter, and 0.3 per cent higher than the same period in 2019.

Meanwhile, multi-unit approvals increased by 16.0 per cent in quarter ending April 2020 when compared with the previous quarter and are 1.5 per cent higher than the same time last year. 

“All states recorded a monthly increase in approvals with the exception of New South Wales, which declined by 29.9 per cent during April driven by a fall in multi-unit approvals,” Mr Reardon added.

In seasonally adjusted terms, building approvals for the three months to April 2020 quarter increased in Tasmania (up 18.4 per cent compared with the last quarter), NSW (up 10.9 per cent quarter-on-quarter), Western Australia (up 10.4 per cent) and Victoria (up 9.3 per cent). 

Meanwhile, approvals declined in Queensland (to be down 1.4 per cent quarter-on-quarter) and South Australia (down 2.5 per cent) also in seasonally adjusted terms. 

New home building to weigh on GDP

Mr Reardon noted that the construction industry “directly engaged” over 1 million employees in 2018-19 and contributed 5.8 per cent to GDP.

“New home building activity will weigh further on Australia’s GDP growth in the second half of 2020,” he said.

“Following [Wednesday]’s negative GDP result for the March quarter – and the expected negative result for the June quarter – the economy is in urgent need of measures to kickstart our post-COVID-19 recovery. 

“The persistent decline in residential building activity has detracted from GDP for the last six quarters and is already 14 per cent down from the peak. This contraction was prior to the COVID-19 restrictions impacting home building.”

Mr Reardon stated that a “sharper contraction in residential building activity is imminent.”

“The long lead times for residential building mean that the full impact of the COVID-19 crisis on residential building won’t hit GDP until later in the year.

“Without appropriate support, up to half a million jobs could be at risk as the number of homes Australians will build next year is expected to be around half of the number of homes we built last year,” Mr Reardon warned. 

He stated that the impact of halting overseas migration, the absence of international student arrivals and an uncertain domestic economy will all likely see the housing market continue to contract throughout 2020 and 2021.

“This shock will reverberate through the residential building industry, up and down the supply chain. Employment in the sector is not expected to recover within the next two years. 

“The sector engages over 1 million people, and we expect to build half as many homes next year as we did last year, requiring a halving of the number of hours worked on building sites,” concluded Mr Reardon.

[Related: Australia now in recession, says Frydenberg]