The boom in residential construction throughout Australia appears set to last for around one more year as low interest rates continue to drive strong buying activity in the short term.

After that time, a combination of regulatory tightening on residential mortgages, slowing population growth, below trend economic growth and an evaporation of previous undersupply is expected to lead to an easing back to more normal levels of housing starts over the longer term.

For now, it appears the low interest rates which are largely driving the current boom are set to remain in play amid a combination of subdued economic conditions and an absence of upward pressure on inflation. According to many commentators, monetary policy settings are likely to remain relatively unchanged throughout most of 2016 before gradually tightening thereon after.

That said, a number of forces are starting to work against the current boom. Judging by housing finance data from August and September, moves on the part of the Australian Prudential Regulatory Authority to tighten home lending standards in June have curbed the worst excesses of speculative lending for housing investment, although owner occupier lending doesn’t seem to have slowed down much.

Below trend rates of economic growth and relatively high levels of unemployment may be helping to keep interest rates low but will not exactly encourage new home buyers to open their wallets. Population growth has slowed and is expected to moderate further. While some markets still face a shortage of housing, current record levels of construction do seem to be pushing the national market closer to balance at an aggregate level.

Because of this, after reaching record levels of 211,490 this year (current forecast), the Housing Industry Association expects dwelling commencements to come in at a still historically high 186,080 in 2016. Beyond that, however, starts will drop back to more normal levels of between 164,000 and 168,000. The largely speculative and investor-led multi-residential sector will be worst impacted, and detached housing starts will also contract by around 10 per cent over four years.

Not surprisingly, the current boom is placing significant pressure on the availability of skilled professionals and tradespeople. Recruitment outfit Hays reports strong demand for project managers, contract administrators, estimators, site construction staff and site managers, as well as plumbing, bricklaying/blocklaying, carpentry, crane dogging and rigging, tower crane operation, glazing and traffic control. Meanwhile, HIA chief economist Harley Dale says trade rates are currently rising at around five per cent per annum and supply in areas such as bricklaying, ceramic tiling, site preparation and general building is tightening.

Outside of new home building, the HIA says activity in the renovations sector is expected to remain subdued over the near term.

State by State:

With healthy levels of interstate migration, the strongest economy out of any state by far and a disappearing but still modestly existent undersupply of stock, New South Wales has a strong pipeline of forward projects. The state is set to remain the outstanding performer in residential construction throughout the country. Whilst housing start numbers will fall back, HIA suggests, they will remain at very strong levels in 2016 and at reasonably high levels from a historic perspective over the next several years. Dale says New South Wales is in an interesting situation where strong levels of home building is helping to underpin momentum in the economy which in turn was further stimulating demand for housing.

Activity will also remain at elevated levels in Victoria throughout 2016 as the state breaks ground on more than 50,000 homes for the sixth time in seven years amid a strong pipeline of projects and a level of net migration and population growth which exceeds that of any other state.

Further out, however, commencement numbers are expected to drop back to more normal levels. Anticipated softer conditions in the state’s manufacturing sector and broader economy won’t help, nor will the evaporation of what was previously a large undersupply of stock amid current levels of new dwelling completions. Indeed, BIS Shrapnel expects the market for detached housing to remain roughly in balance but that for high-rise apartments to be oversupplied within two years.

Likewise, the volume of work coming in throughout Queensland will remain elevated throughout 2016 amid a good pipeline of forward work, improving conditions in important economic sectors such as retail and tourism, and a correction to what was previously considered to be significant levels of undersupply.

Also like Victoria, however, conditions are expected to drop back to historically normal levels from 2017 onward as interest rates edge up the remainder the previous undersupply evaporates.

Activity is expected to hold up at respectable levels in the Northern Territory but drop back in Tasmania and Western Australia and remain quiet elsewhere. The expectation for the NT is somewhat surprising in light of falling house prices and rents, suggesting there is ample supply in the market. Furthermore, the state’s economy which may struggle once the Ichthys Gas project draws toward completion.

Western Australia faces the prospect of outward interstate migration following the wind up of the mining boom. Remaining states/territories generally suffer from a lack of underlying demand drivers amid generally soft economic conditions and slower levels of population growth.housing boom 3 2 1