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According to Westpac senior economist Matthew Hassan, dwelling approvals surged higher over the six months to February, up 12 per cent in trend terms to a record annual pace of just under 225,000.
“Aggregate data shows these gains have been driven by a surge in approvals for units in blocks of four storeys or higher, concentrated, unsurprisingly, in the Sydney and Melbourne markets,” Mr Hassan said.
More detailed local area approval figures released a week after the aggregate numbers offer some additional insights, he noted, revealing the degree to which ‘large projects’ are driving recent gains.
“Using detailed local area ‘crosstabs’ we can identify outliers that represent large individual projects - we use a cut-off of 270 dwellings, which effectively captures the very top 0.5 per cent of the distribution of readings,” Mr Hassan explained.
“This shows ‘large projects’ accounted for 20,000 dwelling approvals over the 12 months to February, just under 10 per cent of all approvals,” he said.
This compares to an average of 7.4 per cent over the last five years and just 2.0 per cent over the eight years prior to that.
Importantly, Mr Hassan notes that these ‘large projects’ account for all of the gains in total dwelling approvals since August – a rise of just under 15,000 in annualised terms.
“‘Trimming’ these outliers arguably gives a better indication of underlying momentum. In contrast to the 12 per cent surge reported in the headline figures, approvals excluding large projects have been flat or in a slight downtrend over the last six months, depending on where you draw the cut-off,” he said.
“Intriguingly, this ‘underlying’ picture is more in line with trends in buyer sentiment, as measured by the ‘time to buy a dwelling’ index from the Westpac-Melbourne Institute Consumer survey. This cooled off noticeably over 2014. Although the relationship between turning point in buyer sentiment and approvals has shifted around in the past it seems to operate with quite a long lag.”
Mr Hassan said buyer sentiment has improved more recently following the February rate cut. However, the lagged effect of previous weakness and potential for gaps in the lumpy pipeline of ‘large projects’ means approvals could easily hit a nasty air pocket some time in early 2015, he said.