By Craig James

Dwelling starts; consumer confidence

Dwelling starts: Starts rose by 0.5 per cent in the September quarter after a 0.2 per cent increase in the June quarter. Work started on a record 215,053 new dwellings over the year to September, up 13.4 per cent on the previous year.

Record homes being built: At the September quarter a record 194,252 homes were being built – the most in Australian history. Just over 65 per cent of dwellings being built are apartments.

Building pipeline: There were 33,713 homes in the September quarter that had been approved for construction but where work hadn’t commenced, down 2 per cent from record highs.

Consumer sentiment: The Westpac/Melbourne Institute index of consumer confidence fell by 3.5 per cent in January to 97.8. A reading of 100 is the dividing line separating optimism from pessimism.

The consumer confidence data is important for retailers and consumer-facing businesses. Building & building material companies are affected by dwelling starts including Boral, James Hardie, Adelaide Brighton, Brickworks, AV Jennings Limited, Devine Limited and Beacon Lighting.

What does it all mean?

Anyone questioning the health of the economy needs to be pointed in the direction of the home building sector. More homes are being built than ever before, with almost $44 billion of work currently in the pipeline. There are signs that activity is topping out – but at high levels with a record amount of work to be completed.

Investors should display a healthy degree of caution because there is a huge amount of new housing stock to be absorbed over the next few years. Rental vacancy rates need to be watched closely.

The monthly consumer confidence data has lost relevance given that a weekly version is released with a similar sampling regime. As noted yesterday, confidence has fallen over recent weeks due to financial market volatility and a lower Australian dollar.

What do the figures show?

Building starts

Dwelling starts (commencements) rose by 0.5 per cent in the September quarter after a 0.2 per cent increase in the June quarter. Work started on a record 215,053 new dwellings over the year to September, up 13.4 per cent on the previous year.

At present a record 194,252 homes are under construction.

Across Australia, starts in the September quarter rose in five states: NSW (up 2.4 per cent); Victoria (down 3.8 per cent); Queensland (down 1.0 per cent); South Australia (up 1.2 per cent); Western Australia (up 1.7 per cent); Tasmania (down 20.7 per cent); Northern Territory (up 17.4 per cent); and the ACT (up 0.7 per cent)

In the year to September, dwelling starts were higher than the decade average in all the states & territories except for South Australia (down 2.9 per cent). Starts were at record highs in NSW and Victoria.

Dwelling starts in NSW in the year to September were 60.7 per cent above the decade average.

The value of commercial building starts edged up from $28.88 billion to $28.95 billion in the year to September. The annual total of commercial building starts is near 9-year lows.

Consumer sentiment

The Westpac/Melbourne Institute index of consumer confidence fell by 3.5 per cent in January after falling by 0.8 per cent in December. The confidence index is up 4.3 per cent on a year ago.

The current conditions index fell by 5.1 per cent while the expectations index fell by 2.4 per cent.

Four of the five components of the index fell in January:

The estimate of family finances compared with a year ago was down by 9.4 per cent;

The estimate of family finances over the next year was down by 2.3 per cent;

Economic conditions over the next 12 months was down by 5.0 per cent;

Economic conditions over the next 5 years was up by 0.39 per cent; and 

The measure on whether it was a good time to buy a major household item was down by 1.7 per cent.

State sentiment levels: NSW (up 3.3 per cent), Victoria (down 1.0 per cent), Queensland (down 3.1 per cent), Western Australia (up 3.5 per cent) and South Australia (down 3.0 per cent)

Job market outlook: The Westpac-Melbourne Institute Unemployment Expectations Index rose by 0.7 per cent in January but was 5.3 per cent below its value a year ago.

The ‘time to buy a dwelling’ index rose by 13.9 per cent to the highest reading since May 2015.

What is the importance of the economic data?

Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

The Australian Bureau of Statistics releases data on dwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.

What are the implications for interest rates and investors?

Strong home building activity will support the economy over the next 12-18 months. As a result, CommSec expects no change to interest rate settings in coming months.

There could be an ‘ingestion’ problem as residential projects get completed. If investors can’t find tenants, new homes may be put up for sales, depressing home prices.