Despite being at record highs at the moment, the building market in Australia is set for three years of decline going forward as housing markets shift from a position of modest shortage to one of oversupply in many markets, a leading forecasting firm says.

In its Building in Australia 2017-2032 report, economic forecasting firm BIS Oxford Economics said the overall value of commencements in residential and non-residential building during 2016/17 would come in at around the same level as the record breaking levels of $107.3 billion achieved throughout 2015/16 (in 2014/15 dollars) amid massive levels of momentum within the residential market and significant improvements in non-residential building.

Beyond that, however, it said that commencement values would drop by a cumulative amount of 17 per cent in real terms over the three years to 2019/20.

Leading the decline will be the red-hot housing sector, where BIS says residential construction starts will fall by 31 per cent from 233,617 dwellings to around 160,200 dwellings.

That, in turn, will be led by an overheated apartment market in which BIS says commencement numbers will drop by 50 per cent.

“The record breaking residential building boom is already turning, offsetting growth in starts for non-residential building through 2016/17,” Adrian Hart, associate director of construction, maintenance and mining at BIS Oxford Economics said.

“Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, as supply catches up to underlying demand.

“BIS expects the total residential market to fall by around 31 per cent over the next three years, but the decline in the number of private high-density apartments getting underway nationally will be closer to 50 per cent.

“Overall the slump will be similar in percentage terms to the residential downturns in the mid-1990s and the introduction of the GST in 2000/01.”

According to BIS, a large part of the decline revolves around the shifting dynamics in terms of the overall levels of demand and supply within the housing market.

Courtesy of a massive level of completions which are set to come online following elevated levels of building activity in recent years, it forecast that an overall shortfall of a few thousand dwellings now will shift to an oversupply of more than 30,000 dwellings by 2019.

This will be most pronounced in resource states such as Western Australia and Queensland.

By 2019, Western Australia will have an oversupply of more than 25,000 homes, whereas Queensland will have an oversupply of around 15,000 dwellings.

In the meantime, a current shortage of 40,000 homes in New South Wales now will shrink to around 17,000 by 2019, whilst a shortage of around 6,000 dwellings in Victoria will virtually evaporate.

Outside of housing, BIS says activity in the non-residential building market will increase again this year following a cumulative increase of 25 per cent over the past two years combined, albeit with momentum unlikely to be sustained and softer levels of activity likely beyond that.

In particular, activity on healthcare and education buildings will lift amid a range of tertiary health and education projects set to get underway.

All up, BIS says the building downturn will present a challenge to target growth rates of three percent for the Australian economy as outlined in the 2017/18 Commonwealth Budget.

“The strong growth in building commencements since 2012/13 provided a welcome boost for the Australian economy at a time when resources-related investment and construction activity fell heavily,” Hart said.

“But with residential building activity in particular now set for a sharp decline – along with its multiplier impacts on industries such as construction, manufacturing and retail – the Australian economy will need new investment drivers to support growth and employment.”