Home Building Boom to Peak, with Key Markets Slipping into Oversupply 1

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Monday, July 20th, 2015
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Strong building activity coupled with slowing population growth will see oversupplies emerge in Victoria and Queensland over coming years, limiting the scope for further growth in activity

The record-beating residential building boom has already reached its peak and will soon begin to run out of steam, according to leading industry analyst and economic forecaster, BIS Shrapnel.

According to the company’s Building in Australia 2015-2030 report, national dwelling commencements are estimated to have reached their peak over 2014/15 and will begin to gradually decline from this level in coming years.

“After recording strong growth over the past few years, we estimate that total dwelling starts reached just over 210,000 in 2014/15, an all-time record high,” said Dr. Kim Hawtrey, Associate Director with BIS Shrapnel. “From this level, national activity is then forecast to begin trending down over the following three years, with the currently high-flying apartments sector leading the way down.”

While a sizeable dwelling stock deficiency coupled with record-low interest rates drove building activity to its current highs, Dr. Hawtrey warns that the national market will shift into a mild oversupply by 2018.

“Low interest rates have unlocked significant pent up demand and underpinned the current boom in activity, but as population growth slows while construction activity remains strong, new supply will begin to outpace demand,” said Dr. Hawtrey. “This will see the national deficiency of dwellings gradually eroded and some key markets will begin to display signs of oversupply.”

In the company’s latest forecasts, net overseas migration is expected to continue its recent downwards trend and gradually ease in response to softer employment and economic growth, resulting in a weaker outlook for population growth. However, residential building activity has continued to grow and new dwelling completions are estimated to have pushed above the underlying demand for dwellings in 2014/15 for the first time since 2011.

Based on BIS Shrapnel assumptions about household formation per thousand head of population, the Building in Australia 2015-2030 report estimates the national dwelling stock deficiency reached a peak of around 108,000 dwellings by June 2014. After a strong 2014/15 this has slipped back to approximately 85,000 as at June 2015.

“After a sustained period of underbuilding, new dwelling supply is now exceeding demand. With investors and upgrader/downsizers providing enough momentum to sustain activity at historically strong levels, we estimate that the national deficiency will have been largely satisfied by 2018,” said Dr. Hawtrey. “Although the outlook will vary significantly between markets.”

Importantly, despite reaching its peak in 2014/15, new dwelling starts will continue to track at historically high levels over the coming years. Low interest rates will continue to support demand, with investors and upgrader/downsizers expected to remain the driving force across the national market.

“While we are forecasting a fall in activity from its current peak, this will mostly be felt in the higher density segment of the market,” said Dr. Hawtrey. “After climbing to nearly 100,000 starts there will be an inevitable adjustment in the other dwellings sector as they move back to more sustainable levels. Detached houses – the late bloomer in this cycle – will prove more resilient, holding up in 2015/16 before beginning a more subdued decline beyond that.”

The Building in Australia report provides a respected and independent medium-term assessment of the Australian building industry outlook. It contains demographic trends and detailed forecasts on the residential (housing, other dwellings), non-residential (commercial, industrial, social and institutional) sectors, and the alterations and additions market, by state. The report covers key drivers for housing demand, population trends, the outlook for building material costs, and the non-residential building cycle.

Residential building outlook

According to the Building in Australia 2015-2030 report, housing starts are estimated to have grown by 16 per cent in 2014/15 to reach a record high of 210,000. The stellar result was underpinned by 24 per cent growth in the other dwellings sector which is estimated to have peaked at 95,500, while detached houses delivered a solid result of 114,600 new starts.

From this level BIS Shrapnel expects to see activity begin to fall in 2015/16 (-5 per cent) as pressure is gradually alleviated in some markets. The decline will be led by the other dwellings sector as it falls back from its unsustainable high, while detached house starts will remain flat. Affordability concerns will begin to emerge in the key Sydney and Melbourne markets which will limit demand despite interest rates remaining at record-low levels.

New South Wales, Victoria and Queensland led the way in 2014/15, but only New South Wales is expected to maintain growth into 2015/16 off the back of a strengthening economy and a persistent deficiency of dwellings. Queensland will remain relatively flat around a strong level as its market moves towards balance, while Victoria will experience the most significant reversal of the three eastern states (-7 per cent). Off such a sustained period of strength, Victoria has been over-building relative to demand and is estimated to see areas of the Melbourne market move into oversupply.

Western Australia will experience the sharpest decline of the five major states (-13 per cent) as its economy slows in the wake of the mining boom and population growth softens sharply. This will see a significant stock deficiency quickly evaporate, and with vastly reduced pressure in housing demand in the key Perth market, subsequently building activity will soften considerably.

Over the medium term, activity will slow steadily to 163,800 new starts in 2017/18, with modest increases in interest rates in late-2016 combining with softening pressure in key markets to limit new development. From this level a new, more modest upturn will begin as rates are cut once more and population growth begins to pick up.

Non-residential building outlook

Following a sharp decline in 2014/15 (-13 per cent) non-residential building commencements are expected to bounce back in 2015/16 (+10 per cent) to $33.42 billion (constant 2012/13 prices). Growth will be driven by the commercial and industrial sectors (+17 per cent) with retail (+29 per cent) in particular performing well. Social and institutional building (+1 per cent) will remain mostly flat, although other than a sizeable fall in the other social and institutional sector (-35 per cent), most sectors will perform reasonably well as health (+17 per cent), entertainment and recreation (+12 per cent) and education (+6 per cent) all record solid results.

Despite some lumpiness due to the impact of major projects coming through in the numbers, the overall profile for non-residential building over the forecast horizon is mostly flat, with activity fluctuating between $30 and $35 billion. Despite a forecast modest improvement, economic conditions will remain subdued and it will take time for capacity constraints to build and underpin a new round of development.

Hence, after a further six per cent improvement in 2016/17 BIS Shrapnel expects to see activity slip back in 2017/18. Beyond that, a healthy upwards growth trend will return as improving economic conditions begin to set in. However, this will only take activity to roughly $35 billion by 2019/20, a level on par with the 2013/14 result.

Total building outlook: summary

According to the Building in Australia 2015-2030 report, the total value of all national building commencements is estimated to have grown by four per cent in 2014/15. Strong growth in new residential building activity (+17 per cent) was sufficient to outweigh the decline in non-residential building (-13 per cent), with other dwellings (+27 per cent) in particular leading the way. Alterations and additions also provided modest support, increasing by three per cent.

The value of total building commencements will then flatten over 2015/16 and 2016/17 as increases in non-residential building offset declines in the residential sector. Total activity will slump in 2017/18 (-12 per cent) as all sectors experience declines in response to rising interest rates. Moderate growth will then return over 2018/19 and 2019/20.

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  1. Sam

    Can someone out there please explain these graphs to me? In 2014 the difference between "Underlying demand" and "Dwelling completions" is about 15,000 homes…. but the "Undersupply" is about 108,000 homes????? In 2011 when the difference between "Dwelling completions and "Underlying demand" was a SURPLUS of about 25,000 homes, the graph shows an "Undersupply" of about 30,000 homes. The same inconsistencies exist throughout the graph (or so it seems).