Balancing Act: How building approvals and demand shape Australia’s housing market

Australia’s housing market is a complex ecosystem shaped by the push and pull of supply and demand. We are operating in an environment where construction costs, population growth, interest rates and building approvals intersect to influence property prices.

Inside the housing market

Though construction cost inflation has stabilised after a significant rise over recent years, costs remain elevated, particularly due to higher labour and materials prices and ongoing logistical challenges. This means that new housing developments are still costly, but the slower inflation rate offers a slight reprieve for builders and developers, potentially increasing project viability.

The demand for housing remains strong, driven by high immigration levels and a population growth rate that continues to outpace housing supply. Recent data suggests that while demand has surged – reaching its highest levels in a decade – the supply of new homes is lagging, with dwelling approvals and construction commencements below historical averages. This supply-demand imbalance is expected to sustain upward pressure on housing prices and rents in many regions, especially in urban and high-demand areas.

In response, there is an increased focus on larger, multi-dwelling projects, particularly in areas of high demand, where population growth and local economies are relatively robust. Additionally, infrastructure investments in renewable energy and transport are expected to bolster the construction industry, though this may not immediately address residential shortages.

How do building approvals and housing prices interact

Building approvals, issued by local councils, signal the number of new residential buildings (like houses, apartments, and townhouses) that developers intend to build. They act as a leading indicator of housing supply, showing what will likely enter the market in the near future.

When building approvals are high, more housing is expected to enter the market, which can ease upward pressure on prices if demand remains constant. Increased supply can help slow or stabilise price growth, especially if it meets or exceeds demand.

When building approvals are low, a constrained supply pipeline can contribute to price increases if demand for housing is high, as limited new housing stock means buyers have fewer options.

Even with high building approvals, there’s often a lag before approved projects are delivered and available for sale or rent. Factors like construction timelines, financing issues, and supply chain disruptions can delay the impact on housing availability.

Building approvals are just one factor among many influencing housing prices. Demand-side factors like interest rates, population growth, employment rates, and economic sentiment play significant roles in determining prices.

For example:

• Low-interest rates typically increase borrowing capacity and boost demand, pushing up prices, even if building approvals are high.
• Population growth, especially in major cities, can drive demand faster than new supply from building approvals, leading to sustained price increases.

The relationship between building approvals and prices can vary regionally. In cities like Sydney and Melbourne, demand tends to be consistently high, so even with increased building approvals, prices may continue to rise. In contrast, in less populated areas, an increase in building approvals might more directly stabilize or reduce prices.

Current ABS data

In recent months, building approvals in Australian cities, including Sydney and Melbourne, have been low. According to recent Australian Bureau of Statistics (ABS) data, approvals for new dwellings showed a slight increase of 4.4% in September 2024, reaching 14,842 dwellings on a seasonally adjusted basis.

However, despite this small uptick, the overall trend in approvals remains subdued, with many industry experts highlighting challenges like high interest rates and elevated construction costs, which continue to hinder new developments.

In particular, Sydney and Melbourne have seen building approvals fall to multi-year lows. Recent data for Sydney recorded only 849 new units approved in a month, while Melbourne approvals were at 1,922. These low numbers indicate a broader trend of constrained supply in Australia’s largest cities, exacerbated by rising population growth, which further pressures housing availability and prices.

This decrease in approvals has led to a housing supply crunch, especially as immigration rates push population numbers higher, intensifying demand. Industry experts and analysts note that while there are some infrastructure investments, they may not address the immediate residential shortages, especially in high-demand areas of Sydney and Melbourne.

In summary

While higher building approvals generally aim to moderate housing price growth by increasing supply, the effect on prices also depends heavily on demand conditions, economic factors, and timing.

The upshot for buyers and investors is that although housing prices may not escalate as quickly as they did in recent years, demand pressures could continue to keep prices high in certain segments. Rental markets, too, are likely to remain tight, particularly as government incentives and construction projects are slow to alleviate the supply crunch.

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