The outlook for Australia’s residential construction sector has improved in recent months.

Data published towards the end of 2014 showed that new dwelling commencements (starts) and building approvals for new dwellings reached all-time highs. The RBA decision to reduce its key interest rate at its February meeting also bodes well for the residential construction outlook over the short term. In the year to September 2014, a total of 192,660 new dwelling commencements were recorded. This was the highest total for any 12-month period on record.

The ACI National Outlook is an authoritative forecasting review of the Australian residential construction industry. The Summer 2015 edition was published on February 23. Projections for new home building have been revised upwards since the previous forecasting round. It is now estimated that a total of 195,466 new dwellings were commenced in calendar year 2014, an increase of 16.3 per cent on the 2013 result.

Detached houses accounted for 57.1 per cent of commencements, with multi-units making up 42.9 per cent of the total. During 2014, detached house commencements are estimated to have increased by 16.8 per cent, with a 15.6 per cent uplift in multi-unit starts.

Over time, the proportion of new home building accounted for by multi-unit dwellings has increased. Back in 2004, detached houses accounted for 67 per cent of new dwelling starts, with their share of the market rising to 72.5 per cent in 2009.

The decline in the detached market share partly reflects consumer preferences, lifestyle changes, reductions in average household size, and metropolitan planning strategies. Undoubtedly, however, acute shortages of shovel-ready land supply and long delays in the planning process have contributed to the relative decline in the detached house share of new home building.

Almost every state is estimated to have experienced significant growth in new home building in 2014. The only exception was the ACT, where activity is estimated to have declined by 8.8 per cent during the year.

The strongest increases in new dwelling commencements were in Tasmania (+33.1 per cent), Victoria (+21.5 per cent) and Western Australia (+21.4 per cent). Increases were also recorded in Queensland (+19.2 per cent), New South Wales (+9.7 per cent) and South Australia (+9.5 per cent). In the Northern Territory, new home starts just inched up by 0.9 per cent during 2014.

The latest building approvals data indicate that the pipeline of new home building is still very strong. During January 2015, a seasonally-adjusted total of 19,282 new dwelling approvals were recorded. This was the highest monthly level reported since records began in 1983. In the three months to January, new dwelling approvals reached an annualised level of over 222,000, with multi-units accounting for a particularly high share of the total.

The latest ACI projections indicate that new home building is likely to have peaked in 2014, with new starts expected to ease back by 2.4 per cent in 2015. This will bring dwelling starts down to 190,706 over the year, with a larger reduction occurring in multi-unit dwelling commencements.

Detached house building is expected to fall by 1.9 per cent during 2015, with a 3.1 per cent reduction envisaged for multi-unit commencements. During 2016, a reduction of 6.7 per cent is expected in new dwelling commencements, with the bulk of the reduction affecting the multi-unit segment of the market. Multi-units starts are forecast to fall by 14.3 per cent, with a reduction of 1.0 per cent in detached house commencements.

The geographic pattern of adjustment in new home building is likely to be quite varied during 2015. Growth will remain quite significant in Queensland (+7.4 per cent) and New South Wales (+5.6 per cent). ACI forecasts that the slowdown will be much more significant in WA (-14.9 per cent), with weaker activity also affecting Victoria (-6.5 per cent) and SA (-4.9 per cent). Amongst the smaller states, most are likely to see reduced new home building activity during 2015. These include Tasmania (-4.6 per cent), the NT (-21.8 per cent) and the ACT (-21.1 per cent).

New home building has been one of the strongest components of domestic demand over the past year, and the easing back of activity represents a challenge to policymakers. During the December 2014 quarter, overall GDP increased by 0.5 per cent. New home building rose by 5.3 per cent during the quarter, contributing 0.2 percentage points to GDP growth during the quarter. The strength of new home building is helping to partly counterbalance the adverse effects of much-reduced mining investment and weakening capital expenditure across non-mining sectors.

Renovations activity represents an important area of residential construction, with this segment accounting for almost 40 per cent of residential construction activity in 2014. Nationally, renovations activity has been in a slump over the past four years against the backdrop of poor consumer sentiment, high savings rates and depleted home equity levels.

However, the combination of very low interest rates and revived price growth in key capital city markets is expected to provide something of a boost to the home renovations market. In 2015, we project that the volume of renovations will increase by 1.0 per cent with a stronger 3.2 per cent uplift expected in 2016. An increase of 2.6 per cent will bring the value of renovations activity to over $30.6 billion in 2017.

During the December 2014 quarter, it is estimated that non-residential building fell by 0.9 per cent while engineering construction saw a 1.1 per cent reduction. Developments in engineering construction are strongly tied to mining investment activity. New engineering construction peaked during the December 2012 quarter, and is estimated to have since fallen by over 20 per cent. Much of this decline took place over the course of 2014, with activity in the December 2014 quarter 16.7 per cent lower than the same period 12 months earlier.

Latest approvals data provide some indication of growth in non-residential building. In the three months to January 2015, the seasonally-adjusted value of non-residential building approvals was $8.26 billion. This was some 21.6 per cent higher than the previous quarter, although it was 16.5 per cent lower than the same period one year earlier. There was considerable variation from sector to sector.

Approvals for health buildings totalled $1.14 billion in the three months to January 2015, an increase of 30.0 per cent on the same period one year earlier. However, approvals for industrial buildings fell by 30.8 per cent over the same period to $1.08 billion. Office building approvals fell by 42.1 per cent to $1.06 billion, with a 38.1 per cent reduction in education building approvals taking the value to $892.9 billion. Along with health, the entertainment and recreation building sector was the only major non-residential building sector to see growth, with a 28.2 per cent increase over the year, taking approvals to $488.8 million in value.