Market Report: Boom Times in Housing Construction 2

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Monday, December 8th, 2014
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While aggregate activity in the housing sector in Australia is likely at or near its peak, it appears strong conditions in the market for new housing construction are set to continue for some time and the market for home renovations is likely to improve from a low base.

By any measure, the current market for new residential construction is running hot.

Despite having cooled, approvals for new houses and apartments are still running at around 15,000 per month, implying an annual building rate of 180,000 new dwellings that has only ever been achieved once in around 30 years of records. Thanks to even higher levels of approvals earlier this year, the Housing Industry Association expects national start numbers in 2014 to come in at record highs of 188,020.

Builders almost everywhere are saying things are picking up. While the demand/supply equilibrium of tradespeople remains roughly in balance, construction sector employment levels are at near record highs, and higher levels of demand are being reported for bricklayers, carpenters, plasterers and a host of other trades involved with residential construction.

For now, most forecasters expect this to continue, albeit with activity easing from current sky-high levels. The HIA says starts will remain above 175,000 for at least the next three years; BIS Shrapnel expects massive commencement rates of 190,000 and 186,850 in the current financial year and 2015/16 respectively.

Moreover, for now, the factors underpinning current strong levels of activity look set to remain in place. Language from the Reserve Bank suggests interest rates are set to remain low in the immediate term. Despite strong current levels of activity, a combination of several years of low building activity prior to the current upswing and several years of strong net migration should mean levels of pent up demand are still fairly strong. Housing finance seems to be more readily available than it has been over recent years.

Meanwhile, on the renovations side, an improving capacity of households to fund remodelling and extensions as a result of rising house prices (and thus growing household equity) and an easing of financing availability should help activity in this sector recover at least modestly from its current subdued levels.

Longer term, however, there do appear to be headwinds.

Generally subdued expectations regarding economic and employment growth will make households more reluctant to fork out on housing investments or renovations. Some commentators do expect monetary policy to start tightening toward the latter part of next year, and recent statistics suggest the availability of available land is tightening in some areas.

While planning reforms in Western Australia should help, the abandonment of proposed reforms in New South Wales will not. Moreover, strong building activity itself will eventually eat into the aforementioned pent up demand – in markets and sectors such as the  Perth apartment market, there is already talk of a glut of supply.

Costs, meanwhile, are fortunately expected to remain in check notwithstanding some upward pressure on land prices in some areas. Increases in raw material costs appear to remain subdued and wages are generally expected to remain in check outside of a few categories (upward pressures on trade rates are emerging in bricklaying, for instance) amid generally soft labour market conditions economy-wide and the effect of tradespeople returning from the mines.

Below is an outline according to individual states:

housing starts

New South Wales

With a massive amount of pent-up demand following years of low building activity as well as an improving economy which should continue to benefit from a ramp in infrastructure spending, New South Wales is the home of the current housing boom, with housing starts expected to reach a massive 48,680 (HIA forecasts) this year before rising to 50,870 next year.

The level of investment in renovations, meanwhile, is expected to have bottomed out and will recover but remain at modest levels until at least 2017/18.

Queensland

Similar to New South Wales, Queensland is expected to continue to experience a very strong recovery as years of low building activity has driven significant levels of pent up demand. The state is expected to see extremely strong levels of new housing construction going forward as well as recovering but modest levels of renovations activity, with most of the action taking place in markets in the south-east such as Brisbane, the Gold Coast and the Sunshine Coast.

Victoria

Despite being hit by a downturn in the manufacturing sector and a subdued general economy, along with having loads of stock hit the market due to high levels of building activity in recent years, Victoria continues to defy gloomy expectations of a downturn and is set to break ground on a whopping 53,600 homes this year. Renovations are also at their highest level in 10 years.

Going forward, both new housing and renovations activity will ease back but remain at fairly elevated levels.

South Australia

Seemingly the state with the most exposure to the loss of jobs in manufacturing, South Australia’s economy has been virtually stagnant over the past two years and will not be helped by the pull-out of big automotive manufacturers.

Housing construction has gained ground after bottoming out at awful lows several years ago but will remain at modest levels in the foreseeable future.

Steady to modest levels of growth are expected in renovations.

Western Australia

Notwithstanding the anticipated impact of the resource investment slowdown upon the state’s economy and population, new housing construction in Western Australia is expected to remain at high levels after having peaked this year.

Renovations are to improve modestly after bottoming out this year.

Tasmania

Generally subdued levels of new housing construction are expected to remain amid a stagnant economy and virtually zero population growth.

Renovations activity is expected to bottom out this year.

Northern Territory

New housing construction is set to ease following several strong years bought about by the economic stimulus associated work on the Ichthys project in Darwin.

Renovations activity is expected to ease back but remain at respectable levels by recent historic standards.

Australian Capital Territory

A continued fall back in activity is expected as a surge in construction several years ago boosted housing stock levels and amid a population and economy which will experience a disproportionate impact from public sector cutbacks.

Modest growth is expected in renovations activity.

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  1. paul bidwell

    A great summary Andrew which I support as it relates to Queensland

  2. Andrew Heaton

    Thanks Paul – glad you liked it.