Housing Doomsayers Should Drink Some ‘Happy’ Juice … 1

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Thursday, May 7th, 2015
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Amidst the nation’s ongoing predilection for highlighting negative economic news, there are some positives out there.

Amidst the nation’s ongoing predilection for highlighting negative economic news, there are some positives out there. Two key positives to the Australian economy land in the construction space – record levels of new home building and, arguably, rising residential property prices in some markets. These are obviously not mutually exclusive factors given that a recovery in residential property prices (and transactions) is a factor that drives increased residential development. Increasing residential property prices are not always one of the primary evils of the planet in the way that commentary often disingenuously suggests they are.

What we haven’t seen coming along behind is a broader recovery in economic conditions, which would of course include a sustained uplift in non-residential construction. We need a sustained recovery in business confidence to see that outcome eventuate. The latest business confidence figures showed a recovery that only took us back to where we were at the start of the year. The latest consumer confidence update, for April, fell back for a second consecutive month.

Even I can get bogged down in the negatives! However, in mid-April we (finally) received confirmation that 2014 was a record year for new home building starts in Australia. Nearly 198,000 starts is a substantially higher level than the previous record of 187,000 set in 1994. This year will be another extremely healthy one, with upward momentum evident for New South Wales, Victoria, and Queensland.

A healthy new home building sector is a positive for many parts of the retail sector, and for a number of Australia’s manufacturers and suppliers, and this list is longer than that … There is a strong ‘multiplier’ effect at work, in other words. As soon as we get a national new housing boom, however, attention seekers are out there talking about Australia’s housing market being over supplied. Give us a break! The boom follows the longest trend decline in new home building activity in Australia’s post war history and economic growth without the positive impacts of strong new home building would be well south of 2 per cent.

Looking beyond housing, the bi-monthly ACI Construction Brief that we release every second Monday morning has regularly provided metrics this year highlighting that non-residential construction has not backed up the residential uplift. Even there, you can still find positives as well as negatives. For example, in 2014 engineering construction activity fell (unsurprisingly) by 12 per cent, but non-residential building activity posted a modest gain of 4 per cent. Furthermore, the overall outlook for non-residential building in 2015 appears weak, but approvals increased moderately in the early months of 2015 – so all is not lost.

We all know that Australia’s economic growth is below trend and that outside of national new home building, not much is happening – although a strong first quarter of 2015 for household consumption is another piece of good news. All I’m trying to point out is that while bad news sells, let’s not ignore the opportunities that the good news represents.

Non-residential building is a case in point where modest growth in 2014 doesn’t look like it will be repeated this year. Look below the surface, however, and there is considerable commercial development occurring in parts of the New South Wales market, for example, and non-residential construction should grow again in that state in 2015/16 after a sustained period of weaker results.

Residential property prices, mentioned at the outset, are another area where the positives tend to get overridden by the negatives. The economic recovery in NSW (CommSec rank NSW the number one economy in the nation) is a housing-led recovery. A rise in residential property prices in Sydney following a decade of massive underperformance was one factor which drove the resurgence in new home building activity. This resurgence took new housing starts to their highest level in 12 years, pulled the overall state economy out of the mire, and directly and indirectly generated thousands of new jobs along the way. Doesn’t sound like a bad story, but oh no, people have to go out of their way to make it sound disastrous!

It is true that in the ‘mature’ stage of the cycle Sydney housing prices are now growing very quickly and we need to keep an eye on that.

Residential property prices across the combined eight capital cities in Australia rose by 7.9 per cent in 2014 according to CoreLogic RP Data. Price growth for Regional Australia was a considerably softer 2.9 per cent.

Sydney was the standout, followed (some way behind) by Melbourne. Nowhere else stood out. That will remain the story through 2015 and into next year.

Super low interest rates are driving further demand for housing in 2015. Figures released on May 1 by CoreLogic RP Data show those prices for the eight capital cities combined increased by 7.9 per cent in the three months to April this year, when compared to the same period in 2014. Three month annualised growth is running at 10 per cent rather than 4.8 per cent at the end last year, so one could argue that the further lowering of rates in February this year is having an impact.

An acceleration in Australia-wide prices is unlikely and headlines of a ‘national housing price boom’ will remain erroneous and, at times, almost irresponsible. Sydney is an ‘out-there’ market which is outperforming now following a decade of under-performance – and we need to keep a watchful eye. Melbourne price growth still looks relatively strong, but is easing as the force of an overall weak economic environment – reflected in income growth – rears its head.

The rate of growth in dwelling prices in Australia is indeed likely to ease in 2015/16 – slow household income growth and higher unemployment rates are big brakes.

There are literally thousands of property markets around Australia. Many will grow in inflation-adjusted terms over the next 12 months and many won’t. In aggregate, Sydney looks to be well out in front, Melbourne is kind of in the race, Brisbane is accelerating from effectively last place, and the rest have some training to do.

Universally negative economic news out there – rubbish. National housing price boom – rubbish!

 

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  1. To be sure, it is true that their might be some signs of oversupply in some markets. In Perth, for example, rental vacancy rates which are well above long-run averages as well as falling rents may indicate that the recent construction boom there may well have overshot in the short term. In Hobart, basically zero population growth creates some doubt about the sustainability of the recent construction upturn there. In Melbourne, the apartment market may be heading into oversupply amid the previous planning minister's enthusiasm for sky-high apartment towers in and around the CBD.

    But overall, for the most part, much of the data out there does seem to indicate that many markets are undersupplied. BIS Shrapnel, for example, puts the national dwelling shortage at around 100,000 (around half of which it says exists in New South Wales). It is true that the much needed home building recovery will progressively eat into the undersupply in that state (and that's a good thing), but any talk of a national undersupply would appear to be, at this stage, premature to say the least.