You know your multi-residential building sector is an the middle of an unprecedented when boom when you have a three-month period in which the number of units and apartments on which ground breaks exceeds any other previous quarter on record by more than 11 per cent.

The nation has also broken its own record for construction starts in this sector for five consecutive quarters, and the value of work in the pipeline has nearly has doubled in just two and a half years.

Make no mistake. Australia is in the middle of the biggest apartment building boom ever seen. At 31,261, the number of units and apartments upon which ground broke in the March quarter this year eclipsed the previous record set just one quarter earlier by around 11.5 per cent. At $32.296 billion, the dollar value of work in the pipeline is almost twice levels recorded as recently as the September quarter of 2013. That bodes well for the near-term outlook with regard to multi-residential building activity, which the Australian Construction Industry Forum forecasts will come in at whopping $23.264 billion in 2016/17 – just shy of the record $23.550 billion the forecaster reckons will have been achieved when the final numbers come out for 2015/16 and miles above the paltry $13.757 billion which was achieved as recently as 2011/12.

Primarily, the boom has been felt in eastern states. Compared with the June quarter of 2014, starts in New South Wales, Queensland, Victoria and the Australian Capital Territory and South Australia were up by 103.7 per cent, 98.8 per cent, 60.3 per cent, 53.4 per cent and 38.1 per cent respectively. Including detached houses, the overall pipeline of residential work is at record levels in New South Wales, Queensland and South Australia, whilst that in Victoria is close to record levels.

All this has been underpinned by a combination of low interest rates, strong population growth, massive demand from foreign investors and what was previously considered to be a significant level of undersupply in housing stock.

Nevertheless, questions about how long the party can last are emerging. Indeed, whilst interest rates appear set to remain low for some time, finance appears to have dried up amid moves on the part of the Australian Prudential Regulatory Authority to clamp down on excessive lending for development and investment in the multi-residential property sector. Loan to value ratios – the proportion of a market value of the property which a bank is willing to lend – are now generally at around 70 per cent when it comes to new, small apartments.

Lending to foreigners, as well, appears to have suffered after spot checks on loan applications detected widespread fraud earlier this year. New surcharges levied upon foreigners when it comes to stamp duty on property purchases in Queensland, New South Wales and Victoria have probably not helped. All this is making it hard for developers to achieve the required levels of pre-sales in order to get the go-ahead from their own financiers.

Added to that, there is the issue of the massive volume of new stock which is set to hit the market over the next couple of years across a number of markets amid the already large volume of new construction which has been coming through in this sector. Because of this, BIS Shrapnel reckons apartment prices three years from now are set to be lower than they are today in almost every market – not exactly a scenario which does not promotes massive levels of investor confidence in this area. Finally, national population growth has slowed up a bit over the past couple of years, albeit with the population continuing to grow at 1.4 per cent per annum.

For now, approvals still seem to be running at extremely high levels, though they have tapered off a little, meaning that the pace at which new work is coming in remains strong.

That said, there are some signs that things may indeed be easing up. Compared with the same period in 2015, new project numbers were actually down 7.7 per cent in the first quarter of this year, CoreLogic RP Data suggests – albeit with the dollar value of new projects entering the pipeline actually being up by almost 17 per cent. Project deferral and abandonment numbers were up 23.4 per cent (from 124 to 153) and 24 per cent (from 125 to 155) respectively, though the dollar value of abandoned projects has actually fallen. These could be the early signs that things just may be starting to slow down.

BIS Shrapnel senior researcher Angie Zigomanis said the boom in apartment construction had most likely peaked and would more than likely drop away as opposed to undergoing any form of huge collapse.

In addition to investors in off-the-plan type apartments being deterred by the tighter financing conditions as well as the weaker price outlook and fears about oversupply in some market referred to above, Zigomanis says a final area of concern revolves around a labour shortage and the potential for upward pressure upon construction costs as supply within the labour market tightens.

“I think it could be a last hurrah,” Zigomanis said, referring to the approval data.

“In Melbourne for example, we’ve seen high rise apartment approvals ease back over the last six months ago. It’s a similar story in Brisbane. Sydney is, I think, still at elevated levels, but I think New South Wales and Sydney have topped out more or less and are starting to go over the other side.

“That suggests that maybe the March quarter (in commencements) may be a last hurrah and it maybe downward from here. But it’s probably deflation rather than collapse.”

Zigomanis does say, however, that the near-term outlook for various participants within the construction chain would vary according to the stage at which they would typically be involved. Whilst those involved in front end excavation work might find their market has peaked for example, those who work in later stages of projects such as plasterers will probably find that demand for their services will remain strong for at least the next year or two and may even pick up over the near term.

The Housing Industry Association’s Harley Dale is more optimistic. Whilst acknowledging that a pull-back in activity from today’s sky-high levels is likely, Dale says activity will still be high by historic standards. In its latest forecasts, the HIA does have multi-residential commencements dropping by more than 40 per cent from a recent high of 108,150 in calendar 2015 to 63,720 in calendar 2018. However, even at that level, unit and apartment commencement numbers will still remain at relatively historically healthy levels.

Whilst acknowledging that there may be pockets of oversupply in some markets, meanwhile, Dale cautions that the multi-residential market is multi-faceted and that notions of oversupply at an aggregate level are over-exaggerated.

“Overall, I think the oversupply situation is overdone,” Dale said.

“Are there pockets of oversupply? Yes, there probably are. Is there an overarching oversupply? Well my goodness, when you are talking about record levels of intake of overseas migration into Victoria and New South Wales which primarily is flocking to Melbourne and Sydney, it’s a little bit forlorn to say that we have an aggregate oversupply of apartments.”

Dale expresses frustration at what he sees as at times shallow commentary about the state of the apartment market.

“I think people need to put their money where their mouth is,” he said. “There is a lot of scaremongering about how apparently the market is massively oversupplied and how that is going to be the end of the housing market in Sydney and Melbourne.

“Make no mistake, if that was to occur, then you are effectively calling a recession in the Australian economy because that’s the end outcome it would have in terms of a broader economic consequence.

“If people want to talk doom and gloom about how the oversupply in housing is so massive that it’s going to permeate its way through the broader housing market beyond the apartment markets which you are talking about and having a really detrimental impact, well then you are talking about Australia’s first recession since the early 1990s.

“That’s a big statement to make. People don’t seem to be prepared to step up and say that even though they are prepared to call a massive oversupply on some parts of the apartment market.”

Outlook in the States

ACIF expects almost all states to continue to experience very high volumes of output throughout 2016/17 following what is expected to have been a record breaking year across several states in 2015/16. Activity is expected to drop back thereafter, but should remain at historically high levels. As mentioned above, several states are seeing new work come in at record levels at the moment and have a record pipeline of work which should keep most contractors extremely busy over the short term.

Asked about the states which are most vulnerable to any downturn in activity, Zigomanis points to Queensland and Victoria, where he says oversupply could well be felt over the next two years. Of course, not much is expected from Western Australia, which is seeing a slowing in population growth associated with the resource sector pullback. It is also generally believed there are significant levels of oversupply in that market following a boom in construction during the peak resource period and a slowing rate of population growth now that the resource sector construction boom is fading.