Manufacturers Should Diversify: Housing Economist

Tuesday, February 11th, 2014
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Manufacturers and retailers whose businesses are impacted by changing patterns in residential construction should consider long term strategies such as product diversification and vertical integration in order to position themselves to best manage changes in home building composition, a key building industry economist says.

Housing Industry Association chief economist Harley Dale said the last 20 years had seen a trend decline in detached house construction as a proportion of overall residential construction in Australia from around 70 per cent of all new dwelling units to around 60 per cent – a time during which the multi-residential share had grown from around five per cent to just over 20 per cent.

Dale said these trends have affected manufacturers and retailers upstream, as those whose offerings were more suited to detached housing saw a decline in share of that type of construction. Others whose materials were used intensively in apartment construction (e.g. tilt-up concrete) felt the pinch less.

Dale said those who install swimming pools or manufacture outdoor furniture are good examples of those affected by the relative trend away from detached housing.

“If you are living in an 18-storey apartment, it probably has a swimming pool but it only has one,” Dale said. “So there’s a source of demand that isn’t there. With regard to items such as outdoor furniture, presumably in many instances at least you have a smaller outdoor living area in an apartment- one or two balconies, say – than what you would have in a detached house or even a semi-detached townhouse. Therefore, the amount of outdoor furniture you require is conceivably less.”

“Similarly if you move inside, if you look at furniture and fixtures – carpeting, floor tiles, just to use a few examples – clearly the square metre size of an apartment might be as small as 50 or 60 square metres or one hundred plus square metres for a larger apartment. But it’s not 180 to 250 square metres as with a detached house, so the actual square metre floor space of living area has implications for the volume of internal products and materials which are required for the construction.”

While cautioning there is no guarantee the trend toward multi-residential construction will continue in the near term, Dale said there are a number of strategies upstream providers can adopt in order to manage through any change in housing mix which does occur.

One such strategy is diversification; manufacturers with a range of materials which are amenable to different types of construction have greater flexibility than those with a narrower base which is more heavily tied in to low density buildings.

“Another way might be becoming more integrated into the overall process,” Dale said. “So maybe you have a more vertically integrated business model where you have more linkages down and up into the type of housing that is being built rather than just being a manufacturer and nothing else. So you are spreading yourself out a bit.”

For a number of reasons, he said, the low density segment of the housing market should not be written off – albeit with much of the outlook this segment being dependent upon government policy.

For one thing, the outlook for volumes of detached house construction depend not only on this segment’s relative share of the overall market, but also on the overall volume of housing construction. Should the average number of dwellings built per year increase from 155,000 over the past decade to say, 180,000 or 190,000, for example, manufacturers and retailers exposed to the detached housing segment would do well notwithstanding any further decline in relative share of the overall market taken up by this segment.

Moreover, while Dale acknowledges much of the recent shift toward multi-residential dwellings represents a structural change in the market, he says part of it may have been cyclical and disproportionate relative to population tastes and needs.

Indeed, he sees near-term opportunities in semi-detached housing (units and townhouses), which he says caters for those who do not want to live in an apartment but are unable to afford a detached house (such as many first-home buyers).

“There does seem to be a tendency to focus on the growth in apartment construction as if that’s where everybody wants to live,” he said. “There obviously is strong demand for that type of living at the moment. But that doesn’t mean that all-of-the-sudden nobody wants to live in low-density housing. There will always be a demand for low density housing. It’s about governments getting their policies right to ensure that conditions are there for a sufficient supply of that low density construction to actually be undertaken each year.”

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