The end of the year and the impending Christmas break always offers a good opportunity to take stock of the past 12 months and ponder what might lie ahead in the new year.

For many, 2016 will be remembered as a year of geopolitical shocks with the decision of UK voters to Brexit in June and their American friends confounding almost all expectations in choosing Donald Trump as the 45th US President. There is plenty of scope for more surprises in 2017 with important elections in France and Germany, and growing concerns about several big players in the European banking system.

Fortunately, 2016 has been a year of good news for residential building in Australia. The latest HIA estimates indicate that the new dwelling starts reached almost 232,000 during 2016, an increase of 2.8 per cent on 2015’s total. Significantly, this is the highest calendar year total on record and represents the culmination of the longest home building upturn ever which has run since 2012.

Updated HIA forecasts for new home building were released in mid-November and indicate that new dwelling commencements are likely to start declining during the 2017 and continue falling during 2018. The anticipated reduction in new home building reflects a combination of changes, including a slowdown in population growth, tighter lending conditions in some areas of the market, and the introduction of barriers to foreign investor participation in the market such as the $5,000 foreign investor application fee and stamp duty surcharges.

Whereas dwelling price growth currently remains strong, it is likely to slow over the coming year and contribute to the reduction in new dwelling commencements as well.

From peak to trough, the HIA anticipates that new dwelling starts are set to decline by 25.9 per cent. This is expected to involve a 12.1 per cent reduction in detached house commencements whereas multi-unit starts are forecast to fall by a much more substantial 41.8 per cent. Even so, the annual volume of new dwelling commencements is anticipated to bottom out at a reasonably healthy level of 172,000 in early 2019, which is about the same as the average of the past decade.

To provide a bit more context, it is interesting to compare the scale of these likely reductions in activity with previous downturns in new home building. The projected reduction of 12.1 per cent from peak to trough in detached house starts is relatively shallow compared with the magnitude of detached house contractions over the past 40 years.

Typically, detached house starts have fallen by about 25 per cent during the 10 downturns they have experienced since the 1970s. The largest reduction in detached house starts occurred following the introduction of the GST in July 2000, when activity fell by 38 per cent over the course of a year.

The mild decline expected in detached house starts over the next few years is closest in magnitude to the relatively gentle contraction in detached house building between 2004 and 2006 when commencements fell back by 12.3 per cent.

Multi-units have accounted for a disproportionately large portion of the upturn in new dwelling commencements since 2012, making this side of the market more exposed to a coming fall-off in activity. Since 1971, there have been 10 downturns in multi-unit dwelling construction with an average peak to trough reduction of about 30 per cent. The anticipated reduction in multi-unit dwelling starts is therefore comparatively deep, and is likely to be of similar size to the downturn in multi-unit starts between 1974 and 1976, when multi-unit starts fell by 41.5 per cent. The only time there was a bigger reduction on the multi-unit side was between 1981 and 1983 when activity dropped by 45.5 per cent from peak to trough.

The concentration of high rise apartment building in the Sydney and Melbourne markets means these two cities are currently important engines of residential building activity nationally. The dominance of the New South Wales and Victoria markets in residential building was confirmed in the latest HIA Housing Scorecard, in which the three largest states took the top three places in the rankings with respect to the performance of their housing markets.

NSW topped the rankings decisively, well ahead of the other seven states and territories, thanks to strong results right across the 14 indicators of residential building activity. NSW scored particularly strongly with respect to the detached house side of the market, while second-placed Victoria is doing particularly well in terms of home renovations activity. Third-placed Queensland’s strongest area related to multi-unit dwellings and was ahead of South Australia, which was the state which experienced the largest improvement in its performance as evidenced by the HIA Housing Scorecard. The ACT was just behind South Australia in fifth place. Western Australia, the Northern Territory and Tasmania were neck-and-neck in the lower echelons of the rankings, separated by only the narrowest of margins.

The HIA Housing Scorecard also compared the eight states and territories in terms of the volume of first home buyer loans. Rather starkly, the report found that the number of FHB loans in every state and territory was well below its average of the past decade – clear evidence of the affordability challenges facing younger buyers in all parts of Australia.