Building approvals falter

The COVID-19 pandemic has exacerbated weakening construction activity

2 July 2020 | Toby Thomas

The building and construction sectors are currently one of the largest direct and indirect contributors to the Australian economy. Yet, both industries are currently facing an array of challenges underpinned by slower economic activity and the COVID-19 pandemic.

Approvals collapse in May

Analysis from AMP Capital senior economist Diana Mousina examines the latest building approvals data from the Australian Bureau of Statistics.

The findings show that building approvals plunged by 16.4% in May and have now declined by as much as 11.6% in 2020. Total building approvals are tracking at the lowest level since early 2013.

The majority of the decline in May is attributed to semi-detached approvals (mainly units) which collapsed by 34.5%. The figures indicate that house building approvals fell by a much smaller 4.1%.

According to Mousina, these weaker figures are less than surprising. She writes, “Housing construction was already slowing before COVID-19 happened. The decline in building approvals started in late 2017 and started bottoming in late 2019, but the COVID-19 pandemic has led to further falls in construction activity.”

Notably, the ABS is predicting that this downward trend is expected to be prolonged due to the ‘economic hibernation’ caused by COVID.

Mousina adds, “the COVID-19 pandemic has had a lasting impact on household and business incomes and the future state of the labour market looks much weaker than before COVID-19, so it will take some time for residential construction to lift back to its pre-coronavirus levels.”

Falling immigration weighing on housing demand

An uncertain future for new immigrations to Australia is a key headwind for these industries.

Mousina’s analysis sees net migration declining by around 200,000 over 2020 and 2021 (compared to the 240K annual increases in net migration over recent years).

This will translate to lowering demand for new housing by up to 80,000 dwellings until 2022. Lower demand for housing will also lead to slower supply (or construction) and all the associated trade services that go into housing construction.  

On the flipside, housing construction may profoundly benefit from the federal government’s new HomeBuilder program, which gives grants to eligible applicants for the construction of a new home or for major renovations to an existing property.

This scheme will boost will demand for new housing over the coming six months, as the government is expecting to approve 27,000 grants from this scheme.

Yet, Mousina warns the program is unlikely to generate enough new housing construction to make up for the losses associated with lower immigration housing demand. AMP Capital expects further weakness in construction activity over the remainder of 2020.

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