Victoria to build more multi-unit dwellings than detached houses: CBA's Michael Workman
GUEST OBSERVER
Victoria is set to build, for the first time ever, more multi-unit dwellings than detached houses in 2016.
It will mark a significant shift to more urbanised living by the city destined to have the largest 12 population in Australia, of 8 million, in 2050. Melbourne’s population was 4.4 million at the end of 2014 and Victoria’s was 5.9 million. Total residential building approved in 2014/15 was a record $20.2bn, up 20% from 2013/14, with 50% in detached houses.
Victoria’s residential building approvals were running at a record annual (or through the year) pace of 68k in July. The equivalent national approvals figure also hit a record 221k in July, driven by a strong rise in multi-unit approvals in Melbourne and Sydney over the past year.
In Victoria, multi-unit dwelling approvals, mainly high rise apartments in the metropolitan areas, now account for around 50% of the Victorian total. It compares to about 60% for NSW which has been building more multis than detached homes since the mid-1990s.
One of the major trends in the inner Melbourne suburbs over the past decade is that the traditional industrial and warehouse areas have been turned over to residential, usually multi-unit developments.
The proximity to the city offers distinct travel advantages along with a preference shift to apartment and high-rise life styles. The multi-unit developments are a more affordable alternative to detached houses in nearby suburbs. The State Government’s policies, like exempting off- the-plan purchases from stamp duty, have assisted the upswing.
Detached houses represent just under 50% of total approvals. Most of the houses tend to be built in outer-metropolitan suburbs or the regional centres where new land prices are more affordable.
The recently announced height limits on residential buildings by Victoria’s State Government will undoubtedly curb some inner-city construction. We expect that more dwellings will be built in the outer suburbs. Demand conditions are expected to stay relatively firm, unless there are Federal Government changes to investor-related tax policies or foreign investor access to the residential property market.
Victoria’s residential construction forecasts
We expect to see an average of 65k new dwellings built in Victoria across both 2015 and 2016, based on approvals. In our view it means around 33k multi-unit dwellings and 32k detached houses in both years. The multis tend to be built in the inner suburbs.
Victoria’s construction boom is dominated by the high-rise developments. The approvals data shows that high rise apartment blocks (four or more levels) account for 80% of all multi-units and 46% of total residential. So there has been a marked change in the building materials used compared to new detached homes. It has coincided with a reduction in Australia’s manufacturing capability through a prolonged period of an over-valued Australian dollar.
Victorian approvals by region, by number and value
The detached houses are predominantly constructed where land is available, in the outer suburbs which account for 50% of the 33k total of new houses in 2014/15. However, there are a significant percentage of new detached homes (at least 20% of the 2014/15 total of 33k) that are new-for-old knockdowns in the inner Melbourne suburbs. New construction can be more financially appealing and quicker than renovation in some cases.
The regional centres like Bendigo, Ballarat and Geelong are also building large numbers, about 30% of the total, which is positive for regional jobs in construction, retail and transport.
Victoria has some features that tend to favour building compared to the other States. It has a large population, in one of the smaller Australian states, with good transport links. There are large supplies of accessible and affordable land around Melbourne and the regional cities suitable for residential.
For the multi-unit developments the approvals data shows that 74% of the 2014/15 total of 33.5k will be built in the inner-city areas. But that means about 23% will be built in the outer suburbs, usually around the major transport links. The Victorian Government is undertaking a considerable development program that will improve new transport links around the outer suburbs as the population increases.
There is also a significant contribution from Alterations and Additions (A&As) in the total Victorian residential construction picture. The figures here include A&As approved by local councils but the level of actual A&A expenditures is at least two to four times higher. This is because not all A&A need approval from local councils. In the national accounts, A&As spending is estimated at 40% of the total residential investment.
In Victoria, A&As approved were valued at $2.3bn in 2014/15 or about 11% of the total value of approved residential construction. But actual spending could be as high as $8bn. Inner-city A&As totalled $1.3bn according to the approvals data, which was about 6% of the total value of approvals. A&As have a major influence on hardware, whitegoods and furnishings retailing.
The current building cycle – longer duration?
The current Victorian building cycle differs from the previous ones in a number of ways which could extend its duration. Interest rates look set to stay at relatively low levels for longer. It has fuelled an extended lift in residential property prices, allowing sellers and developers to move more properties. Prices have also risen for commercial, industrial and retail properties.
On current indications, interest rates do not look they will be rising in Australia until 2017, at the earliest. The inflation outlook remains quite subdued, despite the lower Australian dollar, and wages growth is moderating.
The “pass-through” time between approval and completion is lengthening because there are more high-rise developments. They require more site preparation, including demolition and excavation. They usually have extensive underground car parking and often involve multi- use developments where commercial, retail, accommodation and cafes are included, such as the large new developments underway in the suburbs, like near Box Hill railway station. Construction periods are lengthening and can easily take more than a year. Some of the large high-rise developments in Melbourne’s CBD have reported construction periods close to 3 years.
Overseas investors, ie non-residents, have emerged as a significant new source of demand for the property developers in the last three years. They are playing a much more active role in the new residential market thanks to a significant easing of the Federal Government’s regulations around foreign purchase of all types of local property. At this stage it does not appear that there will be any regulatory changes in the current political cycle. But the newly announced Turnbull Government may be more amenable to future changes.
Population and pent-up demand pressures have been more intense, raising demand levels, for the last ten years. It coincided with an unusually weak new dwelling supply response which underpinned strong rises in rents and dwelling prices. Higher student numbers are an important part of the population increase. Victoria’s population growth has eased back to an annual rate near 100k, but that is still high compared to a decade ago.
If, as expected, new construction activity in 2014/15 is 65k, it will match the underlying demand from population growth and, most probably, some of the pent-up demand from previous years. But the combination of a better jobs market performance and firm population growth should mean demand conditions remain relatively firm.
There have also been press and anecdotal reports, sourced from the power and water providers, that some (possibly as much as 20%) of the new inner-city apartments are not fully utilised, ie they may be not lived in for a majority of the year or leasable. So they may not in the rental market. It may help explain why Melbourne rental growth is running at around 2%pa, rather than weakening in the face of a record increase in supply via high construction levels.
The chart showing Melbourne’s residential rents and vacancy rates as departures from their longer term average (1995 to 2015) indicates that despite the large supply increase, vacancy rates are below their average level, while rents are rising again! It may be different for CBD rents, where there are clear oversupply issues.
Big Population: Melbourne headed for 6 million people in 2031
The ABS population projections have Melbourne reaching 6 million people in 2031, from 4.4 million in 2014. So another 1.6 million people will create ongoing demand pressure for more dwellings over the next few decades. Victoria’s population is expected to rise from its current 5.9 million to 7.1 million in 2031.
In terms of households, Victoria currently has around 2.2 million, with Melbourne at 1.5 million, or about 70% of the total. The number of households in Melbourne is forecast to rise by about 600k to 2.1million in 2031. Dwelling construction in Melbourne needs to average around 40k per year to match the lift in households, assuming population per dwelling numbers are unchanged. Dwelling construction in greater Melbourne has averaged around 40k over the past decade. So the relatively robust levels of construction activity need to be maintained over the next decade to match population growth.
Michael Workman is senior economist, Commonwealth Bank.
