Suppliers to Reap Rewards from Housing Boom

Tuesday, March 31st, 2015
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Suppliers of building materials are set to benefit as detached houses take over from high-rise apartments as a driver of residential construction activity, a conference has heard.

Speaking at his firm’s Business Forecasting Conference in Melbourne, BIS Shrapnel managing director Robert Mellor predicted ground would break on a record 203,000 houses and apartments in 2014/15. He expects the surge in multi-residential dwellings to continue, with continued undersupply in New South Wales driving activity in that state, activity in Queensland continuing to pick up and that in Victoria and Western Australia remaining strong for now.

In a welcome sign for suppliers, however, Mellor said short-term momentum over the next two to three years would shift back toward the detached house segment of the market, which will see start number rise 10 per cent in 2014/15 to come historically healthy levels of 113,000. It would then edge up by a further two per cent in 2015/16 – a contrast to the multi-residential sector in which commencements are expected to drop six per cent in 2015/16 after peaking in 2014/15.

Thus far, Mellor said the high-rise nature of the upturn meant suppliers had not experienced benefits of the same magnitude as they had in previous cyclical upswings.

“I know many of you, when you supply plasterboard, roof tiles – you name it, the volumes come out of detached housing because of a higher market share of those materials in that sector than perhaps particularly in high rise apartments,” Mellor told the conference. “And these are bigger dwellings, so you might still get plasterboard into a multi-res dwelling but if it’s only a 100 or 120 square metre average sized dwelling versus 240 or 250 for a detached house, then the volume opportunity there is just not as good.”

Mellor’s sentiments surrounding the relatively lower benefit of multi-residential construction from the viewpoint of suppliers is shared by others.

Last year, Housing Industry Association senior economist Harley Dale said a switch toward higher levels of multi-residential dwellings would have implications for suppliers across a range of segments, including outdoor furniture, swimming pools, indoor furniture and fittings, carpet, floor tiles and many more as outdoor living areas associated with this type of construction were much smaller and fewer materials were needed indoor to cover a smaller floor space.

More broadly, Mellor says a number of longer term trends were impacting the market:

  • Whereas home owners typically accounted for 70 per cent of new home loans, strong demand for investors meant the current upswing in the housing market was largely being investor driven (both local and foreign) – a phenomenon which has partially contributed to the build-up in multi-residential dwellings.
  • First-home buyers had largely pulled back from the market – potentially as a result of being squeezed out by investors but also due to the withdrawal of home owner incentives.
  • Though remaining positive, levels of net migration would fall back from around 235,000 now to around 150,000 in coming years and would not be as significant as a driver in demand for new housing as it had been in past years of the resource boom.
  • Outside of new housing, the home renovations sector was being impacted by a number of short-term and long-term trends, including a reluctance on the part of households to use cheap finance to upgrade their homes, a growing proportion of medium and higher density dwellings which are less associated with major renovations activity compared with their single house counterparts and a lower incidence of home improvement amongst baby boomers. This phenomenon is not encouraging for suppliers of kitchen and bathroom products, for whom home upgrades make up around 40 to 50 per cent of business.
  • A previously quiet Tasmania has experienced a significant comeback in activity as aggressive home owner incentives have bought forward demand in that market. Elsewhere, activity is still strong in New South Wales, Victoria and Western Australia and is picking up in Queensland but is expected to ease from high levels in Victoria and Western Australia in coming years.
  • The national undersupply of dwellings currently sits at around 100,000 – almost half of which sits in New South Wales and the rest of which is found in Queensland and Western Australia. After five years of strong home-building, Victoria is roughly in balance and indeed, the apartment sector in Melbourne is expected to tip into oversupply in coming years.

Notwithstanding the short term shift back to detached houses, Mellor said longer-term trends toward multi-residential living are here to stay.

“While I suspect that over the next five years, we will have a correction in multi-res, if we start taking a 15 or 20-year outlook then I suspect that some of these changes we have seen in the last five years will be sustained for the long term in terms of a higher percentage of investors, a higher percentage of offshore investors, and in turn, by definition, a higher percentage of multi-residential construction,” he said.

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