Higher density living contributes to building approval surge 

The Australian Bureau of Statistics (ABS) building approvals data for December for detached houses and multi-units reported building approvals surged in December, up by 18.5 per cent, following a fall the month prior, while annual growth in approvals remained negative at 3.8 per cent.

The big rise in approvals in December was in units that lifted 56.6 per cent m/m in December while house approvals fell 2.3 per cent m/m. 

Given the uptick in higher density home building approvals, Master Builders Australia deputy chief executive Shaun Schmitke noted higher density homes were “particularly sensitive to interest rate movements” and have been on the way down over most of 2022 until a sharp jump in December.

“The stronger performance of medium/high-density home is welcome, and we hope this will be sustained as renters are crying out for more new apartments and units,” Mr Schmitke said. 

AMP economist Diana Mousina added that monthly changes in building approvals were “notoriously volatile” because approvals of large apartment blocks can skew the data. 

“House approvals have fallen by ~38 per cent since a peak in March 2021 after the end of the HomeBuilder subsidy and the subsequent rise in interest rates,” she noted.

Looking ahead, Ms Mousina said the near-term trend for building approvals was still likely to be down as the full impact of rate hikes is yet to be felt and there may be “more pain to come” if the RBA hikes the cash rate next week. 

“Weakness in building approvals translates into lower residential construction which is a component of GDP,” she added.

In addition, the decline in building approvals in residential construction is expected to make a “small negative contribution to GDP growth” in 2023. 

The Housing Institute of Australia (HIA) explained that the significant pipeline of work that Australian builders are still completing, combined with ongoing materials and labour constraints, is creating “significant lags” between the RBA’s hiking cycle and on-the-ground activity.

HIA chief economist Tim Reardon said there were 115,358 new houses approved for construction in 2022, down by 21.8 per cent on the 147,552 approved in 2021.

“Much of the decline between 2021 and 2022 was the expected consequence of the end of the HomeBuilder grant in 2021,” added Mr Reardon.

“The adverse impact of the fastest increase in the cash rate in a generation will not be fully observed in building approvals data until later this year and will not hit building activity on the ground until late 2023.

“This lag from the first rate rise until it impacts employment is dangerously long in this cycle. The RBA needs to be very cautious in raising rates as the impact of their actions won’t be observed in official data for nearly 18 months, in this cycle.”

[Related: Dwelling approvals fell 9% in November: ABS]