The market for new home construction in Australia faces several years subdued activity, a leading economist says.

Speaking at the Housing 100 breakfast hosted online by Housing Industry Association (HIA) last week, HIA Chief Economist Tim Reardon said the new home market had already slowed prior to the start of this year and has since been further impacted by COVID.

According to Reardon, HIA expects the overall number of commencements on new detached houses and multi-unit residential construction to contract from around 173,000 in 2019/20 to 139,700 in 2020/21.

This is down from more than 230,000 homes per year during the recent boom in apartment construction and is well below the 160,000 odd dwellings which historically represent healthy levels of home building activity.

Beyond that, commencements will contract further to a low point of 133,100 in 2021/22 and will not return to levels of 160,000 plus until close to the middle of the decade.

According to Reardon, the outlook diverges for different types of housing.

In detached housing, activity is expected to hold up relatively well with starts contracting from 101,400 in 2019/20 to 97,600 in 2020/21 and 94,000 in 2021/22.

Whilst this represents a subdued level of activity, it implies a mild contraction compared with that which is anticipated in multi-unit construction.

Moreover, encouraging data on new home sales and home sales contracts since the forecasts were issued in mid-August suggests that there is ‘more upward pressure on that number than downward pressure’, Reardon says.

Compared with multi-unit construction, the detached home segment of the market is much less dependent upon immigration to prop up demand.

As well, tight timeframes in respect of the Commonwealth HomeBuilder grant – which require  construction contracts to be signed before December 31 this year – mean that the detached home segment will receive the largest benefit from the grant of any housing type.

A different story emerges in multi-unit construction.

Overall, multi-unit commencements are expected to fall from 71,600 in 2019/20 to 42,100 in 2020/21 and 39,100 in 2021/22.

This compares with levels of more than 100,000 multi-unit starts achieved over four consecutive years from 2014/15 until 2018/19.

Most impacted will be the ten-storey plus high-rise apartment complexes which have been going up on Australia’s east coast.

Construction on semi-detached dwellings (units, townhouses etc.) should hold up reasonably well.

Since new arrivals often go into apartments when first arriving, the apartment segment of the market is most heavily exposed to the slowdown in migration.

Even before COVID, ABS data indicates that population growth had slowed from 1.7 percent in the year to June 2017 to 1.55 percent the following year and 1.50 percent in the year to June 2019.

Following COVID related restrictions on international travel, population growth is now expected to slow much further.

To be sure, Reardon says green shoots are emerging.

Across most states except Victoria, new home sales have rebounded following the announcement of the Commonwealth Homebuilder program.

Confidence has also rebounded amid expectations that interest rates may be cut further and will remain low.

Housing finance data indicates that some momentum has returned to home lending in general and loans for the purchase or construction of new homes in particular.

Beyond specific activity levels, Reardon says COVID has driven a shift in consumer housing preferences.

Surveys of new home buyers and off the plan buyers by HIA Economics reveal that almost half (44 percent) of those who are looking to purchase or build a new home have altered their preference since COVID.

Of those who have changed their preferences, 48 percent now want spaces for working at home such as home offices or study nooks whilst 28 percent would like additional living spaces and 23 percent have a stronger preference for suburban living.

The preference for working space at home applies both to buyers of detached homes as well as to buyers of apartments.

According to Reardon, these preference trends are evident not just in Australia but have been similarly observed by HIA’s sister organisations in places such as the US, Canada, Israel, Norway and South Africa.

He says the trend back toward detached homes likely arises from people spending more time at home and making major life decisions along with the specific nature of COVID.

As well, there is a growing challenge in terms of consumer access to finance.

In fact, a HIA Economics survey of building companies found that consumer access to finance was the single biggest pressure point on home building companies (43 percent) ahead of keeping their workforce employed (32 percent), weak or deteriorating demand (31 percent), skilled labour availability (29 percent) and the price and availability of materials (26 percent each).

Reardon says access to finance has been a challenge over the last decade as regulators have tightened up bank lending for residential loans. Over the past ten years, the time taken to process loans has blown out from around two weeks to about two months. Securing a loan with a ten percent deposit, meanwhile, is now more difficult than it was in 2009.

State by State Outlook (major states only)

In terms of states, according to Reardon:

  • Western Australia will be the best performer with dwelling starts expected to come back to around 16,000 homes per year after falling to a low point of around 10,000 homes at the start of the year. Whilst an improvement, this is below the state’s long-run average of around 24,000 homes per year. In addition to the Commonwealth HomeBuilder program, the industry in WA has also benefited from a generous state-run incentive program. Constraints in WA do not relate so much to weakness in demand but rather access to skilled labour and available land.
  • Next is Queensland, where new home sales over the three months to August were around eight percent higher compared with the same time last year. Here, Reardon talks of several markets. In South-East Queensland, he expects detached housing to hold up reasonably well but multi-units to struggle as interstate migration from Sydneysiders seeking a change of pace continues but international migration slows. In the centre and north, prospects are mixed as housing markets in some areas benefit from an upturn in mining activity but those in other areas which rely on tourism will see lower demand.
  • South Australia has a solid and stable detached home market but was at the bottom of the cycle in terms of multi-unit construction and will not see an upturn in this segment until international migration returns.
  • In New South Wales, areas such as the Hunter region, the south coast and the Capital region have performed strongly since Homebuilder but the market in Sydney has been more challenged as price caps on HomeBuilder eligibility restrict the ability of purchases to access the grant in light of the current cost of housing in the capital. As well, the slowdown in employment on multi-unit construction will dampen overall market demand.
  • Lastly, Victoria will be difficult to read until we see the bottom of a cycle whereby sales fell back in July and August and are expected to remain low in September amid the Melbourne lockdown. What is certain, however, is that Victoria market has been driven by population growth of two percent or thereabouts for the past decade and the state will be challenged to find new forms of economic momentum after the lockdown. Add to that the impact upon employment on multi-unit construction sites as they slow down across the year and aggregate demand across the economy will slow. This will flow through into reduced demand for home building. As a result, whereas most states expect to see a bottom in the detached home market in 2020/21, in Victoria, this is not expected to occur until 2021/22.