Surge in approval for Apartment Developments might result in oversupply

In June, the private apartment approval made an unexpected 20 percent jump, according to seasonally adjusted building permit data released by the Australian Bureau of Statistics.

Citi economist Paul Brennan says that we face a serious risk of oversupply, which might turn an already crowded market into a glut. “The 20 percent rise in private apartment approvals in June potentially will add to the additional supply of new apartments that will come on stream over the next few years,” he warns.

The number of total building approvals rose by 18, 453, or 10.9 percent. The surge is largely concentrated in Sydney, which is catching up to the high-density construction boom of Melbourne and Brisbane.

June’s data caught the market off-guard since last year the number of permits was down 6.6 percent. “It is surprising given the tightening of lending standards and rise in lending rates to investors and interest only owners occupiers that have been engineered by APRA”, Mr. Brennan says.

Slowdown might be coming soon

However, data suggests that the slowdown in approvals might be coming in the next few months. ”The resilience in building approvals suggests that housing activity may take longer than expected to become a drag on the economy”, says Mr. Brennan.

And according to CBA senior economist Gareth Aird, there was a lot to like in the data. “The outcomes fit very much in line with our views that the decline in residential construction over the next two years will be gradual and protracted., ” he says.

“The massive 10.9 percent lift in approvals was substantially stronger than market expectations, and it was large enough to put the trend monthly growth rate into positive territory in June after falling for three months.”