The latest building activity data released by the Australian Bureau of Statistics (ABS) shows a strong correlation between the recent boom in dwelling approvals and the record dwelling commencements in the March quarter of this year.

The high dwelling approvals over the first quarter of 2014 resulted in an 8.7 per cent lift in overall housing market activity; 22.2 per cent higher over the year. Correspondingly, the 48,964 dwelling commencements over the March 2014 quarter was the highest on record.

Observing that there has been a significant lift in housing construction activity over the past two years, RP Data research analyst Cameron Kusher comments that there is a strong correlation between dwelling approvals and dwelling commencements with approvals flowing rapidly through to commencement activity. This benefits the economy through increased spending for materials and labour.

According to the ABS results, house approvals rose by 8.4 per cent over the quarter and house commencements were up 12.8 per cent. Increase over the past 12 months across both approvals and units, has been almost at par with 21.4 per cent for approvals and 22.6 per cent for commencements.

However, there has historically been a strong correlation between the two key indicators of housing market conditions. Unit approvals in the most recent quarter fell by -6.9 per cent compared to a 4.2 per cent increase in unit commencements. Compared to 12 months ago, unit approvals are 35.4 per cent higher, whereas unit commencements have increased by 27.1 per cent. Unit approvals are at near-to record high levels (despite the fall over the most recent quarter) while unit commencements were at their highest level ever over the March 2014 quarter.

Mr Kusher notes that the construction of a single house is much less risky than construction of a multi-unit dwelling because the latter requires a level of presales before construction commences and potentially faces financing issues as construction progresses.

Comparing house and unit approvals with house and unit completions, Mr Kusher observes that house completions often reach, or at least come close to the previous peaks in house approvals, while the same can’t be said for units where units approved for construction will often make it to commencement but are more likely than houses to ultimately not be completed.

Over the 10 years to March 2014, there have been 1,043,641 house approvals and 575,672 unit approvals. Over the same period there have been 1,021,410 house completions and 493,944 unit completions. With 98% of houses approved having been completed compared to 86% of units approved, it is obvious that not all the unit approvals flowing through currently will ultimately end up being completed.