Dwellings approved for construction totalled 13,085 over the month, down from 14,295 approvals recorded in November.
The sharp drop in private sector dwellings excluding houses drove the decline, plunging 25.3% in seasonally adjusted terms.
According to ABS head of construction Daniel Rossi, the December figure further pulled the approvals for multi-unit dwellings down by 19%.
“In 2023, there were 59,174 private other dwellings approved, compared to 73,041 in 2022,” he said.
Approvals for the much less volatile private sector dwellings also saw a drop in December, falling 0.5%.
Over the past year, the number of housing approved for construction totalled 162,194, the lowest annual rate since March 2013.
Even the annual run rate, which stood at almost 168,000, was below the pre-pandemic average by 5% or around 177,000.
Dwelling approvals varied by state, with notable slumps in Victoria (down 18.4%), South Australia (down 11.8%), and Tasmania (down 2.7%).
Meanwhile, growths were recorded in Queensland (up 8.2%), Western Australia (up 7.9%), and New South Wales (up 2.0%).
The value of total building approvals remained on a downtrend, further slipping 6.4% after it plunged 10.4% in November.
Supply lags behind demand
As it stands, the rate at which dwellings are approved creates a lag that further widens the gap between the housing supply and the increasing demand from Australia’s growing population.
“The subdued annual run rate of dwelling approvals stands in sharp contrast with the very strong population growth seen over the past year,” NAB head of market economics Tapas Strickland said.
“The population aged 15 years plus has increased by 664,000 over the past year. This has taken the ratio of the new population per dwelling approval to 4.0, its highest level in the history of the data, and well above its long-run average of 1.5.”
The ramp-up in population growth has pushed both rents and home values up.
Data released by PropTrack earlier this week revealed limited supply and high demand saw rental prices skyrocket in 2023, with both houses and units renting higher than last year by 9.1% and 13.1%, respectively.
Housing demand buoyed by high overseas migration likewise lifted property prices in Australia by 8.7% year-on-year. Median home value is currently at $759,437 as of end January, according to CoreLogic.
Although recent arrivals data suggests population growth should ease, Mr Strickland said “an evident shortage of housing” remains.
“Unfortunately, a supply fix is not coming in a hurry,” he said.
“To put the government’s aspirational target for 1.2 million homes over five years in reach, building approvals would need to return to levels achieved through the 2015-17 east coast apartment building boom.”
High cash rate and construction constraints slow down approvals
CBA's economic team attributed the weak approvals to the currently high interest rates, which disincentivise developers from investing in new projects, and to the increasing building costs and constraints.
Although expectations that the cash rate will be eased this year, given the recent CPI data showing moderating inflation, economists believe we won’t be seeing its effect on housing supply in the near term.
“The more significant planning process involved in larger projects also means that multi‑unit dwelling activity takes longer to respond to stimulatory policy such as the monetary easing we expect later this year,” CBA economist Stephen Wu said.
The same constraints also affected private detached dwelling approvals.
“The building industry at the moment is hitting against capacity constraints and yesterday’s Q4 CPI noted new dwelling costs rose 1.5% q/q as builders continue to pass on higher labour and building material costs,” NAB's Mr Strickland noted.
Despite this, CBA expects approvals to pick up this year, but at a slow pace.
“Our view is that approvals will pick up albeit marginally this year in response to a more gradual increase in the cash rate in H2 2023 and policy being on hold before easing in 2024,” Mr Wu said.
“The change in the cash rate rather than the level tends to drive activity. Even so, this process operates with a lag and so we still expect 2024 to be another weak year for approvals.”
Photo by Jens Behrmann on Unsplash
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