As a New Year approaches, we can hold a positive short-term outlook for housing, but we will also face heightened uncertainty in 2016.
The cycle for new dwelling commencements looks like it peaked in fiscal year 2014/15, or perhaps in calendar year 2015, if we want to split straws. That has been our view for a considerable time.
Renovations activity is still grinding out a recovery, with little sign at this stage of accelerating momentum.
The residential property price growth cycle has peaked, but it's a very disparate geographical story – if you don’t live in Sydney or Melbourne, then you don’t have a boom.
So, where to now?
The ACI Housing Indicator Profile below provides guidance as to the short-term outlook for new home building. We update it each quarter. On balance, the signal is that in 2015/16, and to a lesser extent calendar year 2016, the volume of new dwelling commencements will hold up very well. That is our current forecast and has been our core view for some time.
Granted, there is upward momentum evident for only five out of 13 variables (and even then, the upward trend is almost negligible for new housing finance) compared to six in the middle of the year and 10 last summer. Eight variables are now pointing down.
This is the weakest ACI Housing Indicator Profile in over three years.
It is notable that if you were to look below the surface at the detail of these variables, you would find that the magnitude of the decline in the measures that are softening is generally modest – none of the leading indicators is falling off a cliff. To us, this is further evidence that in the short term, the volume of new home construction will remain very healthy.
The key points to note about this housing cycle are the changing mix of what we build, the large geographical divergences across states and territories, and the downside risk to new home construction from 2016/17.
There are very different trajectories evident for the various types of building approvals and dwelling commencements reported by the Australian Bureau of Statistics – semi-detached dwellings compared to units of four storeys or more, for example. The dwelling composition forecasts produced by Australian Construction Insights, the consultancy arm of HIA Economics, suggests further upward momentum in the short term for detached houses, semi-detached dwellings (of two storeys), and units of one or two storeys.
On the topic of geography, our updated Housing Scorecard will be released on December 15th. Momentum is clearly with the eastern seaboard markets, including some renewed promise for the southeast corner of Queensland. The Housing Scorecard has accurately picked the shifting geographical sands for housing markets over the last couple of years, as has the CommSec State of the States report in terms of broader domestic economic conditions. Our latest Construction Monitor – released on December 9 – tells a similar story for non-residential construction markets.
This eastern seaboard story will drive the short term health of Australia’s new home building sector, together with some pick-up in renovations activity (we hope). It has been a lacklustre cycle for renovations. After reaching a 10-year low in 2013, the annual value of renovations investment has only climbed by 4.1 per cent. We should see a faster pace of growth of around four per cent in the current financial year, compared to 0.6 per cent and 0.1 per cent in 2013/14 and 2014/15, respectively.
Meanwhile the only two strong dwelling price markets – Sydney and Melbourne – will experience a slowing rate of growth as the cycle continues to run out of puff. No doubt that trend will provide the doom-sayers with plenty of opportunity to write exaggerated headlines and try to scare the living daylights out of people.
I don't have any interest in scaring you, but we do need to be aware of the risks around 2016/17 for new home building. I'm an economist; there's always a "but!"
We have four big planets orbiting the new home construction sector. Firstly, there is the lagged impact of slowing population growth.
Secondly, we are building a record number of medium/high density units and we have a record pipeline. That's been very positive for the Australian economy and over-supply concerns are overdone. We're still in uncharted territory, though, and how exactly this part of the home building market unwinds is highly uncertain. That's got to be on the RBA's mind, by the way.
Thirdly, variable mortgage rates are on the rise under the guise of covering increased funding costs. There is more of that to come in early 2016.
Fourthly, the rationing of credit overseen by APRA is more broadly based than justified. By that I mean that outside of certain components of the Sydney and Melbourne markets, there was little or no justification to tighten the credit screws, much less adversely affect some potential new housing projects. It's become a ridiculous situation and one hopes APRA hasn’t stuffed it.
Put these four planets together and we'll need to take care when it comes to 2016/17.
To end on a high note, though, we’re in tune at present. This is still 2015 heading into 2016 and the short term looks promising. So Happy New Year!