Construction boom - has it peaked?

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Interesting article by Cameron Kusher from RP Data who analyses the latest building approvals statistics released by ABS.  Key points:

  • approvals have fallen for 4 of the past 5 months 
  • dwelling approvals are up by 16% compared with June 2013.  Unit approvals are up by 22% and houses by 12%
  • Sydney has recorded its highest ever number of building approvals in the past 12 months
  • The strong construction boom, coupled with the slowdown in population growth means that we may see closer alignment between population growth and home construction

You can read the full article here.

My own view is that we will see micro markets, where there will be an oversupply of new home units.  In the past this has led to an extended period of market adjustment characterised by stagnant or falling property values, and rental vacancies.  Lenders and mortgage insurers become very wary of these locations leading to much tighter approval conditions and lower lending ratios.  

When they cannot shift stock developers will try various strategies such as providing (short term) vendor finance, or guaranteed rental for a short period.  This is fraught with risk for home buyers and investors who will eventually be marked to market when they are required to refinance properties which may have dropped in value by as much as 15%.

Negative Gearing

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This is a great article by Cameron Kusher of RP Data on the subject of negative gearing in investments and in particular in property in Australia.  He points out that while negative gearing is a policy that is largely unique to Australia, it is a tax concession made in the context of much lower government direct investment in the rental property market.

What do you think?  Do we get a decent return for the $8 billion forgone in tax receipts every year?

You can read the article here