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Tighter Lending Impacts Apartment Construction


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Apartment construction experienced its most significant fall in almost six years in August, due to weaker investor appetite for high-rise housing. House building activity also experienced a decline, according to the latest Performance of Construction Index figures released by the Ai Group and the Housing Industry Association.

The measure of apartment-building activity in the latest Performance of Construction Index shed 3.9 points to 32.8 last month, the lowest since October 2012, when it was 27.6, according to the report.  

The National Construction Index is based on a weighted mix of activity, orders/new business, deliveries and employment.

The National Construction Index is based on a weighted mix of activity, orders/new business, deliveries and employment. Readings above 50 show expansion in the market, while readings below indicate declines. The overall Index reading across all sectors still showed growth (51.8), but only the engineering sector showed reasonable expansion. On the other hand, apartments, housing and construction showed either decline or showed a negligible increase.

The Housing sector fell to 49.8 points (down by 0.5 points). The fall in housing was considered by the report to be “marginal” and broadly in line with the stabilisation of market conditions.

Despite calls of a housing crisis, it seems the housing sector, and the apartment sector, in particular, has declined from a combination of tighter lending conditions and oversupply or overbuilding.

The apartment sector, where purchasers are most often local or foreign investors, contracted the most, given the higher number of investors in that sector being subject to tighter investor lending criteria. New orders in the apartment sector, which is a key indicator of investment activity, contracted for a tenth month to 41.3 on the index.

Ai Group’s Head of Influence and Policy, Peter Burn spoke with Jobsite. 

“While the downturn is partly to do with changes in lending criteria, there is also a degree of oversupply or overbuild when it comes to apartments,” Burn explains. “The overbuilding occurred where developers and investors were able to build and sell for a good price, especially in places like Brisbane, Inner City Melbourne, and Sydney.”

“Apartment prices went up over the last ten years, but now they are falling again, creating a supply and demand imbalance and subsequent oversupply,” says Burn.

In Greenfield development sites, Burn believes it can be hard to get the mix right. “These developments are planned many years out. It can be hard to get the pace exactly right ahead of time, but I think we will see prices for apartments and houses balance out as the market self-corrects.” 

"Investors have been a big part of the apartment market. They've been a big part of what has driven this strong increase over the cycle in apartment construction."

In an interview with the Australian Financial Review, HIA economist Diwa Hopkins attributed the decline to the lower enthusiasm from investors, likely due to tightened lending conditions.

"Investors have been a big part of the apartment market,” Hopkins claims. “They've been a big part of what has driven this strong increase over the cycle in apartment construction.

"As that part of the market starts to retreat, we're expecting that to disproportionately affect the apartment side of the market as opposed to detached-house construction and other lower density forms of home construction.”

Hopkins’ theory is borne out in other data released recently, with approvals of apartments in blocks of four storeys or higher dropping by 8.4 per cent in July, according to the Australian Bureau of Statistics. The decline was mirrored by the lowest investor lending rates in nine years.

It wasn’t all bad news in the Performance of Construction Industry Report, with figures showing the construction industry remained in growth overall, as the engineering construction sector grew for the 17th consecutive month. A 0.6 point gain raised the sub-index of engineering work to 55.

New orders for engineering works jumped by 16.5 points to 68.4. Commercial construction also grew marginally but stayed in negative territory, with a slight increase of 0.1 points to a total of 49.2. 

These two sectors are the ones keeping the industry as a whole above 50 points (51.8).

”Lower levels of new orders in the residential sub-sectors point to further slowing whereas for commercial construction and engineering construction the pipelines of new work grew more rapidly in August, pointing to further gains in the period ahead” says Burn.

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