Australia’s Residential Construction Industry Reels as Building Approvals Hit 11-year Low

Australian building approvals have sunk to the lowest level in 11 years, an indicator of a weak residential property investment that threatens to dampen the economy, according to recent data from the Australian Bureau of Statistics (ABS). This trend is being driven by a considerable drop in permits for new apartments, among other factors.

The Business Times reported that total dwelling approvals fell by 8.1% in April compared to the previous month. Permits for apartments saw a sharper decline, falling by 16.5%. Daniel Rossi, ABS’s head of construction statistics, stated, “Total dwellings approved fell to the lowest level since April 2012.”

Meanwhile, Sky News Business Editor Ross Greenwood further emphasized the sharp decline in the approvals of new homes.

Challenges have besieged the residential construction industry in Australia. A significant combination of material and labour shortages, decreasing property prices, and a scaling back of government subsidies that initially bolstered demand during the early stages of the Covid-19 pandemic all contribute to the crisis. Moreover, high interest rates are not only curtailing demand but also escalating financing costs.

The Reserve Bank of Australia (RBA) is currently embarking on its most vigorous tightening cycle in years, raising the cash rate by 3.75 percentage points since May 2022 to 3.85%. RBA Governor Philip Lowe has reiterated the board’s resolve to take necessary steps to keep inflation within the 2% to 3% target range.

However, the marked drop in building approvals threatens to offset this target. The potential housing shortage could spur rental inflation while the economy undergoes a robust revival in population growth due to immigration. Kaytlin Ezzy, an economist at property consultancy CoreLogic, warned, “There is no ignoring the fact that the mismatch between supply and demand continues to be the driving force pushing capital city rents higher.” She added that national unit listings in April continued to be around 20% below the levels typically expected at this time of year, equating to a deficit of approximately 10,000 listings.

Despite market bets suggesting that the RBA’s tightening cycle might be concluding, economists at Goldman Sachs Group, Credit Suisse, and National Australia Bank predict more adjustments to come. The forthcoming data, expected to be released next week, is likely to reveal that dwelling investment subtracted from overall gross domestic product growth in Q1 of the year. Economists anticipate this weakness to persist, largely due to rising borrowing costs.

The question now is how the government and the construction industry will tackle this problem in order to rebalance the housing market and avoid potential economic consequences. The present slump in building approvals is just another challenge to an economy already wrestling with the impacts of the Covid-19 pandemic.

References:

The Business Times: “Australia’s building approvals slump to lowest level in 11 years”  https://www.businesstimes.com.sg/property/australias-building-approvals-slump-lowest-level-11-years 

Sky News: “Australian building approvals tumble to 11-year low” https://www.skynews.com.au/opinion/ross-greenwood/australian-building-approvals-tumble-to-11year-low/video/cdc5bbf9c906a9c2d5b490c0dc85f2a2