What are Building Approval Rates?

Building Approval Rates represent the percentage of building permit applications that are approved by local government authorities. Building Approval Rates represent the number of approved construction projects within a given period, often broken down by property type (houses, apartments, commercial spaces) and region. These rates are typically reported monthly and reflect how many developments have been greenlit for future construction.

Why are Building Approval Rates Important to Property Investing?

Building Approval Rates are more than just bureaucratic statistics – they are a powerful predictive tool for property investors. These approvals serve as a crucial barometer of construction activity, economic confidence, and potential property development opportunities. These rates provide:

• Early indicators of market demand
• Insights into local economic health
• Potential supply pipeline forecasting
• Investment opportunity assessment
• Economic growth momentum signals

A spike in approvals can signal an upcoming increase in housing stock, potentially cooling prices. Areas with consistently low approvals may face housing shortages, driving up property values and rents. High approval rates often correlate with economic growth, as developers and investors respond to demand.

By tracking Building Approval Rates, investors can anticipate market trends, identify emerging growth areas, and make data-driven investment decisions before they become mainstream knowledge.

What Happens if You Don’t Use Building Approval Rates as a Metric?

Ignoring Building Approval Rates can lead to missed opportunities or costly mistakes, leading to significant investment risks.

Overestimating Demand:

Investing in areas with surging supply might lead to stagnant or declining property values.

Undervaluing Opportunities:

Overlooking regions with low approval rates might mean missing high-demand markets.

Mismatched Strategy:

Without understanding future supply, strategies like development or flipping could fail to deliver desired returns.

Missed Opportunity Detection:

You might overlook emerging markets with high growth potential.

Supply Chain Blindness:

Unable to predict future property supply dynamics.

Economic Trend Ignorance:

Missing critical signals about local economic health.

Competitive Disadvantage:

Less informed investment strategies compared to data-savvy investors.

What is the Ideal Building Approval Rates Metric to Look For?

The ideal Building Approval Rates percentage varies based on market conditions and property types. Here is a general guide:

Low (0-30%)

• Indicates minimal construction activity.
• Limited new property supply
• Possible opportunity for value-add investments.

Suggest potential undersupply. Good for renovators or buy-and-hold strategies to capitalize on rising rents and housing prices due to shortage of supply in the market.

Balanced (30-60%)

• Stable market conditions
• Healthy, sustainable growth
• Moderate new property introduction
• Most attractive for consistent investors

Indicate stable market conditions, where demand and supply are evenly matched. Suitable for flipping properties or steady developments. Buy and hold should see consistent growth over extended period.

High (60% +)

• Rapid market expansion
• Potential over-development risks
• Requires careful market analysis.

Signal oversupply risks. While this might mean lower purchase prices, it requires careful timing and strategy.

How are Building Approval Rates Calculated?

Building Approval Rates are calculated as the ratio of approved building applications to the total applications submitted during a specific period.

Data is often sourced from government or industry reports, such as those provided by the Australian Bureau of Statistics (ABS) or CoreLogic. Key considerations in calculation:

• Includes residential, commercial, and industrial permits.
• Tracked by local government authorities.
• Usually reported monthly or quarterly
• Can be segmented by property type and region.

Strategic Applications for Building Approval Rates Within Different Investment Types

Tracking Building Approval rates over time can allow property investors and home buyers to assess whether there is likely over supply, under supply or consistent supply and adjust their timing and strategy accordingly.

Buy and Hold Strategy Applications

• Identify areas with consistent, moderate approval rates.
• Predict long-term property value appreciation.
• Assess potential rental demand.
• Evaluate neighbourhood development potential.

Avoid High-Approval areas unless targeting long-term price recoveries. The risk is with purchasing low (decent price) and then waiting for potential over supply to dissipate.

Focus on Low-Approval areas to capitalize on undersupply-driven growth in pricing and rents.

Reno and Flip Strategy Applications

• Detect markets with high renovation potential.
• Understand local regulatory environment.
• Identify areas with increasing property values.

• Gauge potential return on investment.

Look for balanced approval rates to ensure stable demand during your project time.

Avoid oversupplied areas to minimize resale risks and competition against new builds.

Development Strategy Applications

• Assess local council’s openness to new projects.
• Understand potential development constraints.
• Evaluate land use and zoning opportunities.
• Predict future construction feasibility.

Use approval rates to identify markets with untapped demand.

Avoid starting developments in high-approval areas that may lead to oversupply by project completion.

Common Mistakes When Using Building Approval Rates

1. Over-reliance on single data point
2. Ignoring regional variations
3. Not considering economic context
4. Failing to distinguish between approval types. Approval rates for apartments and houses differ significantly and affect markets differently.
5. Neglecting historical trend analysis and overemphasis on short-term trends. Focus on sustained trends rather than month-to-month variations.
6. Neglecting Other Metrics. Approval rates should be used alongside metrics like vacancy rates, days on market and stock on market for a complete picture.

Examples of Building Approval Rates in Action

Example 1: Developer

Scenario:

A developer is evaluating opportunities in two suburbs: Suburb A and Suburb B.

• Suburb A: Building approval rates have spiked in the last six months, primarily for medium-density housing projects.
• Suburb B: Approval rates are stable and below the long-term average, with a focus on detached houses.

Action:

The developer conducts further research into foundational metrics like days on market, stock on market, median price and vacancy rates. He also researches other economic indicators in population growth and employment data.

• Suburb A shows moderate population growth but also a rising vacancy rate (currently 5%) and rising stock on market percentages over time (2.5% to 4%), indicating potential oversupply.
• Suburb B shows steady metrics in stock on market, population growth and low vacancy rates (2%), with a rising absorption rate suggesting demand for housing is starting to outpace supply.

The developer also cross-referenced the Days on Market (DOM) statistics. Suburb A has a high DOM (60 days), confirming oversupply risk. While Suburb B has a low DOM (25 days), indicating properties sell quickly due to high demand. Suburb B is also experiencing a tight rental market, with yields increasing year-on-year.

Strategic Decision:

The developer chooses Suburb B for a small townhouse project, aligning with demand for low-density, family-friendly housing. By avoiding Suburb A, the developer mitigates risks associated with oversupply and longer holding periods.

Outcome:

The townhouses sell within weeks of completion at a premium price due to low supply and high demand.

Example 2: Renovator

Scenario:

A renovator specializing in flipping properties is targeting a regional city. Building approval rates have recently dipped, particularly for new apartment developments.

Action:

The renovator reviews complementary supply metrics:

• • Stock on Market (SOM): Indicates fewer properties are being listed, suggesting supply constraints.
  • Days On Market: these have been steadily decreasing over the last 12 months also suggesting demand is outstripping supply on the market.
  • Building Cost Index: Shows that construction costs are rising, which may discourage new builds, reducing future competition.
  • Rental Yield: High yields indicate strong rental demand.
  • Population Growth: Steady growth driven by interstate migration supports underlying demand.
  • Absorption Rates: have been slowing rising over the last 18 months which falls in alignment with what the other metrics are suggesting that there is a shortage of supply coming onto the market increasing pressure within the market.
  • Affordability Index: Shows properties in the city are more affordable than nearby capital cities, attracting first-home buyers.

Strategic Decision:

The renovator purchases a dated property in a high-demand area for renovation, targeting first-home buyers. They choose a suburb with low building approval rates, reducing the risk of competition from new developments.

Outcome:

Post-renovation, the property sells quickly at a 20% profit, aided by constrained supply and strong demand from buyers priced out of nearby cities.

Example 3: Buy-and-Hold Strategy

Scenario:

An investor with a buy-and-hold strategy is evaluating properties in two growth corridors, City North and City West. Both areas show promising long-term potential, but they differ significantly in their current Building Approval Rates and related metrics.

City North:

• Building approval rates have steadily increased for medium- and high-density apartments over the last 12 months.
• Stock on Market (SOM): High SOM relative to historical averages, suggesting a flood of listings due to oversupply.
• Vacancy Rates: Rising, now at 6%, as new developments enter the rental market.
• Population Growth: Moderate but insufficient to absorb the increase in housing supply.

City West:

• Building approval rates are stable and below the long-term average.
• Stock on Market (SOM): Low SOM, indicating constrained supply.
• Vacancy Rates: Tight at 1.5%, highlighting a rental shortage.
• Rental Yields: Increasing due to competition among renters.
• Population Growth: Rapid, driven by new job opportunities and infrastructure projects.

Action:

The investor conducts deeper analysis:

• City North appears to be in an oversupply phase (peak into a declining market), with approval rates outpacing demand. Days on Market in City North are taking 50+ days to sell, compared to 20 days in City West.
• City West is entering the growth phase, where constrained supply is meeting rising demand. City West remains affordable for its population, while City North’s higher prices are deterring buyers and renters. Employment growth and wage data favour City West due to a new transport hub attracting businesses and residents.

Strategic Decision:

The investor selects a property in City West for its potential capital growth (CG) and stable rental income.

Outcome:

The property in City West generates high rental yields immediately, thanks to tight vacancy rates. As supply remains limited and population grows, the property experiences above-average capital growth over a 10-year horizon, meeting the investor’s goals.

Related Metrics to Building Approval Rates

No one metric works in isolation so it is important to cross-reference other foundation, supply & demand metrics with other economic and rental indicators.

Here’s how other metrics interplay with Building Approval Rates

Stock on Market (SOM)

Helps measure the balance between new developments and existing inventory. High SOM alongside high approval rates could signal oversupply. Use SOM trends to confirm whether new approvals are translating into listings.

Days on Market (DOM)

A low DOM confirms strong buyer demand, validating approval rate data while high DOM may suggest less demand for properties in this area. Add this to a high building approval rate and you could easily see increases even further in the DOM once this stock is released to the market.

Capital Growth

Low building approval rates signal a constrained pipeline of new housing. This is critical for buy-and-hold investors seeking capital growth over a longer period or even in medium time periods. High approval rates may lead to oversupply, risking stagnation in both property values and rental returns.

Capital growth occurs when there is supply constraints. Limited approvals create scarcity, driving prices higher over time. Identifying areas with declining approval rates before demand spikes ensures capital growth and cash flow.

Avoid oversupply risks by avoiding high approval rates, which often signal saturation, leading to longer holding periods before price growth resumes.

Vacancy Rates

High vacancy rates coupled with increasing approvals indicate potential saturation. Combine low approval rates with tight vacancy rates to identify markets with unmet rental demand.

Rental Yield

High rental yields and low approvals suggest unmet demand for rental properties, ideal for both renovators and buy-and-hold investors. Rising yields indicate strong renter demand, essential for maintaining cash flow in a buy-and-hold strategy.

Population Growth

The key to assessing long-term demand for property and aligning strategies should be to prioritize areas with sustained population growth, ensuring projects align with increasing housing needs. When paired with low building approval rates, rapid population growth signals a supply shortage and a strong seller’s market. Sustainable demand relies on consistent population increases.

Other Key Indicators That Should Be Paired With Building Approval Rates

Employment Data: Regions with job creation and economic stability support higher demand for housing.

Affordability Index: Combining building approval rates with affordability metrics ensures the target market has the purchasing power to support property values.

Infrastructure Development: Planned or ongoing infrastructure projects can enhance demand by making areas more accessible and liveable.

Construction Commencement Rates: Shows projects moving from approval to actual construction.

Building Completion Rates: Indicates project follow-through and market efficiency.

Property Valuation Trends: Correlated with construction activity.

Market Cycle Behaviour – How to Recognize Changes

Just as seasons change, real estate markets go through predictable phases of growth, peak, decline, and recovery – each presenting unique opportunities and challenges for investors who can accurately identify and respond to these transitions.

Growth Phase

• Increasing approval rates
• Rising property values
• Strong economic indicators
• High investor confidence

Building approval rates increase as developers anticipate demand. Focus on high-demand regions.

Peak Market

• Consistently high approval rates
• Potential oversupply risk
• Slowing value appreciation
• Increased competition of new buildings coming to market.

Approvals often plateau or remain steady. Investors should monitor oversupply risks and watch for signs of a turning market.

Declining Market

• Dropping approval rates
• Reduced construction activity
• Lower property values
• Decreased investor interest.

Approvals drop sharply as developers pull back, normally due to viability of projects. Opportunities may arise for buy-and-hold strategies who are looking for long term properties.

Recovery Phase

• Stabilizing approval rates
• Initial signs of economic revival
• Cautious investor sentiment
• Potential investment opportunities

Approvals gradually rise as confidence returns. Ideal time for development investments. Renovators.

Action Steps for Building Approval Rates Analysis

Data Tracking

• Regular monitoring of local council reports
• Utilize online government databases.
• Subscribe to property market research publications.

Use ABS, CoreLogic, or regional council data to monitor monthly trends.

Market Analysis

• Compare rates across different regions.
• Analyse historical trend data
• Consider broader economic indicators.

Compare approval rates to other demand-side metrics like population growth or rental yields.

Strategy Implementation

• Develop flexible investment approach.
• Create diversified property portfolio.
• Continuously reassess market conditions

Tailor your approach based on approval rate trends, ensuring alignment with your investment strategy.

Resources to Find Building Approval Rates Data

1. Australian Bureau of Statistics (ABS) (www.abs.gov.au)
2. State Government Planning Departments
3. Local Council Websites
4. CoreLogic Property Reports
5. Property Investment Research Platforms

Tips for Beginners on How to Use Building Approval Rates Effectively

Use Building Approval Rates Over Time

• Track rates across multiple periods.
• Look for consistent trends.
• Avoid making decisions based on single data points.

Analyse trends over several months to understand patterns. Combine approval rate data with other key metrics for a comprehensive market view.

Comparing Building Approval Rates Across Regions

• Consider local economic factors.
• Understand unique market dynamics.
• Do not assume uniform national trends.

Assess approval rates across multiple areas to identify outperforming regions. 

Building Approval Rates are a vital metric for understanding future property supply and making informed investment decisions yet often overlooked metric in property investment. Whether you are looking to develop, flip, or hold, this metric offers invaluable insights into market dynamics. Investors can make more informed decisions, identify emerging opportunities, and build robust, resilient property portfolios.

By tracking trends, comparing regions, and aligning strategies with market conditions, you can turn building approval rate data into a competitive advantage. Combine this metric with others like vacancy rates and population growth to build a well-rounded investment strategy.

Success in property investment is not just about finding properties – it is about understanding the intricate dynamics that drive market performance. Building Approval Rates offer a window into these dynamics, providing savvy investors with a competitive edge in an ever-evolving market.

Remember, knowledge is your most valuable asset. Continuously learn, adapt, and stay informed to maximize your property investment potential.