Australia: housing starts rapidly catch up

Australia: housing starts rapidly catch up to approvals

Click here for the full Note and disclosures.

Dwelling commencements sky-rocketed a further 15%q/q in 4Q, after bouncing a revised 11%q/q in 3Q (J.P. Morgan +5%). The rise in commencements was led by ‘other’ residential building (up 19%q/q), although new private sector houses were also very strong (up 13%). The majority of development was concentrated in the Eastern states, with starts increasing by 17% in New South Wales, 16% in Victoria, and 13% in Queensland.

We expected a significant rise in commencements given that building approvals through local councils were up 13% over the quarter. Starts have been lagging the improvement in approvals that has transpired over the past year partly as a result of the expanded First Home Buyers’ grant. We had expected starts to steadily ameliorate this gap over the coming quarters. On today’s evidence, however, it appears that building activity already had caught up to the pace of approvals by year-end.

It is difficult to pinpoint a specific cause for this sudden bounce-back: it is not obvious that financing conditions, for example, would have been dramatically easier in the fourth quarter (particularly for higher density dwellings), given the RBA’s three consecutive rate hikes. One possibility is that starts for approved projects had been postponed earlier in the year due to a shortage of available labour – the Government’s public infrastructure programs in the education and health sectors may have crowded out residential building. Since the profile of Government spending on these projects is decreasing (at least in growth terms), such labour constraints may have eased at year-end.

Today’s data is a positive for economic activity in the fourth quarter and beyond, but will also help to ease persistent supply pressures in the Australian housing market With house prices continuing to rise, in stark contrast to those in developed markets overseas, housing has become an increasingly hot topic with RBA officials. A lingering question raised by the US experience leading up to the financial crisis is where the central bank’s responsibilities lie when faced with rapidly expanding asset prices. While the current price dynamic in Australia does not yet represent cause for concern, and officials remain unlikely to react to house price appreciation except at the margin, the best case scenario is that flexible supply allows market imbalances to correct themselves over time. Today’s data should provide some relief on that front.

ENDS