The current new home building cycle is the longest in Australia’s history, having started in mid-2012. What a phenomenal achievement!
There is unprecedented uncertainty as to how an impending down cycle in new home construction will unfold, but the short-term outlook is for modest decline. Geographical divergences in new housing (and renovations) conditions are and will remain very wide.
Here are three key points:
- The short term outlook is still very positive. Indeed, some leading indicators displayed renewed upward momentum in the June 2016 quarter. In the HIA's view, new dwelling commencements are likely to have peaked in the 2015/16 fiscal year, but the decline we anticipate for 2016/17 is mild.
- The HIA Housing Scorecard highlights the wide geographical differences in housing conditions between states and territories. National data and ‘headlines’ mask enormous variation below the surface.
- New South Wales and Victoria are the housing stars, with Queensland chiming in quite well in some areas. It has been a long time since housing in Australia has been an eastern seaboard story. Within this troika of states, how NSW fares will ultimately determine the nature of the national new home building cycle (and property price cycle) in coming years.
In updating the ACI Housing Indicator Profile, a quarterly update on leading housing indicators, we found support for our view - held for some time - that in the short term there will only be a modest softening in new home building conditions. We’re talking 2016/17 in other words.
Based on data from the month of July 2016, as well as June monthly and quarterly results, upward momentum is evident for six out of the 14 variables in our Housing Indicator Profile. Six indicators are pointing down and two variables are neutral (compared to one in the previous update). This profile represents a modest deterioration compared to the last few quarters.
There has recently been some sensationalising of the downside risks to new home construction in coming years due to the unprecedented supply (and pipeline) of medium/high density (MHD) dwellings. We have undertaken considerable research into the MHD segment of the market. We don’t shy away from the inherent uncertainty and risks.
We’re still quick to recognise, though, that the short-term outlook is healthy, while further out the risks are to the downside. There is no need to hype up risks for the sake of grabbing headlines.
The latest round of official building data from the Australian Bureau of Statistics reaffirmed that the new home building sector is in the midst of an unprecedented residential construction boom.
There were a total of 59,684 homes commenced during the March 2016 quarter, which was a new all-time high. Given that the strong March 2016 quarter followed on from a string of healthy quarters during 2015, the total number of dwellings commenced over the year to March this year reached almost 230,000.
However, the current boom is unlike any other that has come before it. There are substantial regional divergences in the levels of activity in various markets around the country, and the mix of dwelling types being built has changed dramatically.
In previous periods when residential building activity has accelerated, detached house building has made a significant contribution to the overall surge in activity. In contrast, the current cycle has been driven by substantial growth in the number of apartments being built. For the first year on record, the number of ‘other dwellings’ commenced exceeded the number of detached dwellings commenced. In the year to March 2016, there were a total of 115,938 dwellings started in ‘multi-unit’ developments, compared to 113,650 detached houses.
This is an important point.
While 113,650 detached house commencements in a year should be considered a very healthy level of activity, it is still some way off the record (132,376 in 1989), and is slightly below the current cycle’s peak of 117,151 reached late last year.
The still strong level of detached house construction has been driven by the eastern seaboard states. Victoria has continued to produce strong levels of detached house building, Queensland has posted a reasonable recovery after the post-financial crisis slump, and the New South Wales market is well and truly revived after its decade of extremely low performance in the 2000s.
A large share of the growth in the current cycle has been due to the surge in apartment construction. Looking at the geographic spread of activity shows the vast majority of the apartment construction activity has been within the eastern seaboard states. The combined total of non-detached (multi-unit) dwellings commenced in New South Wales, Victoria and Queensland account for 89 per cent of all non-detached dwellings commenced nationally.
To further highlight the geographic concentration of activity in this segment, over 75 per cent of the multi-unit dwellings approved during the last 12 months in Australia have been in the greater metropolitan areas of Sydney, Melbourne and Brisbane.
To date, the rate at which new apartment projects have commenced has fallen short of the number of dwellings being approved. As a consequence, the pipeline of approved work awaiting commencement reached a record high at the end of 2015. Provided there are not casualties amongst the projects that are yet to commence, the pipeline will sustain a healthy level of commencements over the short to medium term.
However, the record pipeline of apartment projects generates considerable (unprecedented) uncertainty as to the outlook for the new home building cycle. Should a situation arise where the conversion rate (from a project approval to commencement) drops significantly, then the downturn in activity could be rapid.
Nobody should underestimate the degree of uncertainty regarding just how an impending down cycle in new home building unfolds – it is a risk for the broader economy.