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Duration: 4:21

Level: Beginner

The Building Approvals lesson discusses where to find it, how to forecast it, how it’s influenced, and how it influences financial markets and the economy. As a capital- intensive industry with high interest rate sensitivity, real estate requires the coordination of many moving parts of the economy. An essential part of economic analysis involves tracking the capital-intensive and interest rate-sensitive real estate sector for signs of economic strength or weakness.

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Study Notes:

Before a construction company can begin building structures, they are generally required to secure building approvals from their local authorities. The building approval data release tells us the number of dwellings that have been allowed to be built and their value. While it covers residential and non-residential construction by sector, state and territory, it also includes alterations and additions to existing buildings, renovation and refurbishment work, installation of building fixtures and full demotions of existing dwellings. The Australian Bureau of Statistics calculates the amount of building approvals by collecting approval data issued by local authorities. The data is seasonally adjusted since there tends to be reduced construction activity during cooler months. The numbers are released by the Bureau roughly four to five weeks after the first day of the referenced month around the 3rd day of the month, within the Building Approvals data release at 11:30am Canberra time. The Bureau publishes building approval information and a wide variety of other data to support the decision making of Australian individuals, communities, businesses, and governments.

As a result of the data release, difficult and hard to gather information about the real estate sector can be analyzed. The release is vital to gathering and communicating information about the real estate industry, wealth indicators, capital use levels, interest rate sensitivity, and the consolidation of information across multiple industries. To construct a structure, you typically need approval from your jurisdiction, financing from a bank to pay for the land, materials to build, labor to assemble the materials, and durable appliances to put inside the unit once construction is complete. Building approvals serve as an indication of economic health, since many intertwined moving parts in the economy must work and coordinate together to accomplish the mission of building a structure.

A positive sequence of events is likely to be felt across the economy if construction activity is robust, and we could see gains across many economic data points. If, on the other hand, building activity slows, it’s usually a sign of underlying economic weakness reflected in one or more of the numerous variables that impact the real estate industry. If there’s a global real estate market slowdown like during the 2008 financial crisis, it will likely reflect through slowing economic growth and weakness across many economic data points. The fall of construction activity because of the 2008 financial crisis coincided with a period of weak economic growth, high unemployment, higher interest rates and lower productivity in Australia and the globe.

When studying real estate markets, it’s crucial to analyze builder sentiment, consumer demand for housing, and the cost of capital and supplies. To forecast building approvals look at consumer sentiment, interest rates, real estate prices, sales, loans, and daily commodity prices to get an idea of how builders, banks, consumers and investors feel about the real estate market’s future.

While building approvals are not normally a market moving data release, if they are worse than expected, the market may fall more, and if they are better than expected, the market may rise higher. Market participants generally look at the month-over-month and year-over- year percent changes in building approvals to gauge economic activity. Greater building activity leads to more economic activity and a more favorable climate for companies throughout the world.

Construction investments are some of the most significant financial transactions individuals and companies make. Keeping an eye on the capital intensive and interest rate sensitive real estate sector for signs of economic strength or weakness is a key component of economic analysis.

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Building Approvals explained

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