The latest dwelling commencements figures, released in mid-July, confirmed that Australia started more new homes in the year to March 2015 than in any other 12-month period on record. Not a bad start to the current year, you might say!
It’s certainly a great result for the Australian economy – more residential construction activity, which means more retail sales, manufacturer/supplier activity, employment growth...
If there was as much focus on this truly impressive outcome as there tends to be on any piece of economic news carrying even a vestige of negative connotation to it, maybe we wouldn’t all feel so glum!
Back to the good news. 200,000-plus new commencements. Fantastic! Where would the domestic economy be without new home construction?
Is this the peak of the cycle, though, or can activity go higher still? Is this the new normal or are we positioned for a substantial down cycle? Everybody can have an opinion, but nobody knows.
With the level of activity reaching new records, a vastly different composition of dwellings than any previous cycle, and a number of other unique factors at play, conditions for the residential building industry are in unprecedented territory.
Against this backdrop, we at HIA have completed our usual quarterly review of the outlook for new home building (and renovations activity). Here is the guidance from HIA Economics and Australian Construction Insights (ACI) on where activity may head from here.
The momentum of building approvals and the large ‘count’ of dwellings that have been approved but have not yet commenced construction indicate the potential for dwelling commencements to reach even higher than the current mark.
It is our expectation that mid-2015 will represent the peak level of commencements in the current cycle. Whether this will equate to a higher annualised level of commencement activity in the 2014/15 fiscal year or the 2015 calendar year will be determined by the pace at which approved work flows through to activity on the ground.
Our forecast update shows a total of 213,400 new dwellings are expected to be commenced in the 2015 calendar year, which represents a 7.5 per cent increase compared with the previous year. The level of activity is expected to then fall quite sharply, although this decline is of course exaggerated by the extremely high level reached at the peak.
A fall of 11.5 per cent is forecast for 2016, ahead of a decline of 5.8 per cent in 2017, and a further fall of 1.7 per cent in 2018. Despite this series of annual contractions, the exceptionally high starting point means the declines would only take activity to 174,800 in 2018. This is still a very high level by historic standards and the risks to this outlook are weighted to the downside.
Multi-unit construction will continue to be a bigger part of the housing mix than in the past. This is the key to the current cycle.
There is considerable focus on the multi-unit market, but there are many dimensions to it. What is going on in terms of semi-detached/townhouse product can be very different to the smaller ‘walk-up’ market, or in turn medium density/high rise.
Multi-unit commencements as a total are expected to break through the 100,000 mark in 2015, which equates to a 17.1 per cent increase over the year. To provide some context to the prodigious growth in this part of the market, the strong result in 2015 follows increases of 16.9 per cent in 2013 and 19 per cent in 2014. However, from this point activity is forecast to ease back. A 20 per cent decline in multi-unit commencements is forecast for 2016, and a further decline of 12.4 per cent is forecast for the following year to a cyclical low of around 70,000.
You can read the complete set of the latest aggregate housing forecasts from HIA/ACI here.
ACI’s dwelling composition forecasts, which provide a disaggregated outlook across the five distinct types of new dwelling commencements, were completed on August 4.