The boom in Australia’s detached home construction industry will last into 2021/22, the latest forecast suggests.
Releasing its latest forecasts, BIS Oxford Economics suggests says it expects that overall, the number of dwelling commencements which will take place throughout Australia will come in at historically elevated levels of 190,000 in 2020/21 and 173,000 in 2021/22.
These numbers are lower compared with the unprecedented level of 230,000 commencements that occurred at the height of the recent boom but remain above the 150,000 to 160,000 benchmark which historically represents healthy levels of activity.
That overall picture, however, obscures a contrast between the booming detached home sector and the struggling market in multi-residential building.
In detached housing, BIS says the number of starts will surge by 28 percent in 2020/21 to reach record levels of above 130,000 homes.
Following this, commencement levels will ease back by 8 percent in 2021/22 but remain at historically elevated levels of around 120,000 homes.
Primarily speaking, activity in this sector is being driven by a combination of government stimulus and historically low levels of interest rates.
In terms of stimulus, the primary driving factor has been the Commonwealth HomeBuilder program, through which households have been able to apply for grants to build a new home or to substantially renovate an existing home.
The grant is worth $25,000 for households who signed a construction contract before the program’s original deadline of December 31 and $15,000 where contracts have been signed under an extended version of the program between December 31 and March 31.
When combined various state-based incentives, this has enabled households who build new homes to access grants or concessions worth up to $55,000 depending on the state in which they live and whether or not they are a first home-buyer.
The impact has been massive. As of February 26, data on the Commonwealth Treasury Department web site indicated that 71,148 HomeBuilder grant applications have been made for the construction of new homes whilst a further 17,476 applications have been made for home renovation projects.
Furthermore, activity which is generated by the program has been disproportionately weighted toward the detached home segment of the market.
This is because tight eligibility criteria which governs the length of time within which construction must commence in order for projects to be eligible for the grant has made it difficult for multi-storey developments to qualify for the program.
Beyond that, activity is being further helped along by record low interest rates.
Here, the rate at which households have been able to borrow has fallen to two percent on fixed rate loans and less than three percent for variable rate loans.
By contrast, the outlook for the struggling multi-residential sector is subdued.
As noted above, this sector has largely missed out on the bulk of the uplift in demand which is attributable to the HomeBuilder grant.
Demand for housing in this sector as also been more heavily impacted by the halt to immigration which has occurred as a result of the closure of international borders.
Particularly hard hit has been the high-rise apartment construction sector (four-storeys or greater).
Having already dropped from more than 70,000 per annum at its peak during the recent boom to around 40,000 during 2019/20, BIS expects that the number of starts in this sector will further contract until a slow recovery begins to take hold from the middle of next year.
Commencements are also expected to continue to decline in medium density dwellings (units, townhouses, low-rise apartments), although BIS expects that this activity in this sector will recover more quickly compared with that in high-rise construction.
Speaking at the report’s launch, BIS Oxford Economics Executive Chairman Robin Mellor said the HomeBuilder program would ensure that the overall level of housing construction starts would remain elevated through until at least the September quarter.
This, he said, implied a longer boom compared with what had been previously anticipated.
Prior to the extension of HomeBuilder announced in November, commencement numbers had been expected to weaken after March as the program’s eligibility criteria had required construction contracts to be signed by December and for work to commence within three months of contract signing.
With the program subsequently having being extended to cover contracts signed up until March and changes to eligibility criteria to allow up to six months between contract signing and construction commencement, however, the program is now expected to support elevated levels of dwelling commencements through until the September quarter.
Beyond that, Mellor says the outlook will depend upon several factors.
These include the degree to which detached home commencements contract once HomeBuilder winds up along with the timing of the return in international migration.
“Our expectation is depending on where you go in terms of the current quarter with applications coming through, we are likely to still see commencements operating in detached housing at an elevated level into the September quarter,” Mellor said.
“From a commencement viewpoint, don’t expect that things will fall off dramatically immediately after June (the extended deadline for the commencement of construction on projects which are eligible for the full $25,000 version of the HomeBuilder program.)
“It (the contraction in starts) is more likely to be happening from the December quarter of this year.
“The critical question will be the magnitude of this pull-forward – how much of this demand is being stimulated by low interest rates and how much is being stimulated by the benefit of the $25,000 grant and a lot more than that in some markets (see above)?
“If we are being too optimistic that demand will hold up, there is a risk that 2021/22 could ease back a little bit more (compared with forecast). We will be watching that over the next three to six months in terms of data coming through to give us an idea of the magnitude of the correction which is going to come in in 2021/22 for detached housing.
“In 2022/23, it will be more about the speed of recovery in detached dwellings which will flow through in terms of an improvement from more migrants coming into the country and therefore improving the outlook for rental markets.
State by State (four largest states only):
Across states and territories, BIS expects that the best performers will be those in which the recent boom in high-rise apartment construction has been less pronounced and whose housing markets are less dependent upon migration.
The star performer will be Western Australia, where the number of starts in detached housing is likely to surge form around 10,500 in 2019/20 to around 19,000 in 2020/21 prior to a modest easing in 2021/22.
Aside from the Commonwealth program, the state’s construction market is also benefiting from generous incentives at the state level.
On top of the First Home Owner Grant, this includes a specific state grant of $20,000 for those who either build new homes on vacant land or purchase off-the-plan dwellings. This grant is over and above that which households have been able to receive through HomeBuilder.
Another strong performer will be Queensland, where the boom in apartment construction peaked relatively early in 2016 and the subsequent contraction in multi-unit construction has almost run its course.
Whilst multi-unit construction in that state will remain flat, detached house commencements are expected to rise by 29 percent in 2020/21 before easing off but remaining at elevated levels in 2021/22.
By contrast, less favourable conditions are expected in New South Wales and Victoria.
In New South Wales, the number of starts is expected to contract overall in both 2020/21 and 2021/22.
This will happen as a 20 percent increase in detached home starts in 2020/21 (followed by a one percent contraction in 2021/22 is more than offset by further contraction in attached dwelling construction.
Beyond that, the outlook in 2022 and beyond depends upon the pace at which international migration returns. Should migration return to normal levels, Mellon ways activity could rebound reasonably strongly be 2023/24.
Mellor notes two points.
First, NSW has been undergoing a period of contraction in commencement activity since its peak of around 75,000 starts in 2016.
Already, this has seen the number of starts fall by more than a third.
This is not expected to subside until 2021/22 at the earliest, by which time the number of commencements in the high-rise apartment sector will have fallen from their peak by around 70 percent.
Further, the impact of HomeBuilder in New South Wales has not been as great compared with other states as the high price of real-estate in Sydney has impacted the number of projects which have fallen within the grant’s pricing restrictions on eligibility.
As at February 26, NSW had recorded fewer applications to access the grant compared with those which had been recorded in Western Australia.
This is despite New South Wales having more than three times the population of Australia’s western-most state.
In Victoria, meanwhile, BIS says the overall number starts will edge up by three percent in 2020/21 before contracting by 11 percent in 2021/22.
As is the case with New South Wales, Victoria’s residential construction market has undergone several years of contraction since peaking in 2018 at the height of the apartment construction boom.
That contraction, Mellor says, has further to run.
Moreover, Victoria with its second wave has been the most impacted out of all states by the pandemic thus far.