The outlook for new home-building in Victoria is finally improving, a leading economist says.

Speaking at the recent Industry Outlook breakfast hosted by the Housing Industry Association (HIA) in Melbourne, HIA Senior Economist Matt King provided an overview of the outlook for new home building and existing home renovations across the state.

Overall, King says that a modest recovery in dwelling commencements throughout Victoria is expected to begin during the current financial year following a trough which occurred in 2023/24.

Beyond that, a stronger recovery is expected to take hold in 2025/26 before activity accelerates further in 2026/27 (see chart).

Meanwhile, the value of work done is expected to remain at historically elevated levels in the market for existing home renovations (see chart).

Moreover, King says that the state may potentially outperform these forecasts.

“I will come to you with a sense of cautious optimism today,” King told the breakfast.

“We, in our economics team at HIA have been observing what we’ve been referring to as the outperformance of Melbourne and rural Victoria in recent months.

“And if there’s a forecast that we are strongly considering an upward revision to (of any state/territory in Australia), it would be that in Victoria.

“And so, we see just upside to our forecasts (in Victoria). We are perhaps seeing signs of a return to the Melbourne that I remember when I was on the economics team in 2011 that was always the darling in our report writing. When we skipped up with New South Wales and got to talking about Victoria, it was always a more positive story.

“So, there are certainly signs that perhaps we’re gonna be returning to that in the not-too-distant future.”

Part of broader national housing recovery

King’s comments come as the outlook for new home building is improving more broadly across most of Australia.

In the latest quarterly edition of its National Outlook report, HIA acknowledged that the number of commencements in multi-unit residential building (units, townhouses, apartments etc.) across the nation would be unlikely to experience any material recovery before the middle of next year.

But it expects detached house commencements to increase from a trough of 100,230 in calendar 2023 to 115,690 in 2027.

Several factors helping

According to King, several factors lie behind the  improving outlook.

In particular:

• Victoria’s rate of population growth has eased but is still running at elevated levels of 2.7 percent per annum – the second highest rate of growth in the country behind Western Australia. Most of the growth is coming from overseas arrivals. Since new arrivals require shelter, this is adding to new housing demand.
• Whilst economic conditions remain subdued, both the Victorian and Australian economy have been resilient in the face of a cumulative increase in interest rates from 0.1 percent in April 2022 to 4.35 percent in November 2023. Further, King notes that the diversified nature of Victoria’s economy means that its resilience is being underpinned by resilience across multiple sectors. These include finance, manufacturing, wholesale, professional services, health, education, construction and transport. This contrasts with states such as Western Australia, whose economy is more heavily reliant upon mining.
• Whilst there are signs that employment growth may be easing, labour markets remain incredibly resilient and Victoria’s unemployment rate remains below both its five-year and 20-year averages.
• Whilst currently moderating, wages growth remains at respectable levels – albeit with the level of wages growth in Victoria being softer compared with anywhere else except for the Northern Territory. In fact, there are signs that real wages (wage movements adjusted for inflation) may be stabilising and may even begin to recover as inflation continues to slow. Combined with the aforementioned economic and labour market resilience, the stabilisation in real wages is helping to underpin household confidence to either purchase new homes or renovate existing homes.
• Construction wages growth remains at relatively modest levels of 3.5 percent – something which indicates that labour costs may not at this stage be having a massive impact on construction activity and costs notwithstanding current labour shortages.
• Whilst mortgage areas have been the subject of recent media headlines, these remain at extraordinary low levels of below one percent and are now stabilising again despite having edged up slightly during the second and third quarter of this year. This means that numbers of forced home sales remain at relatively low levels.
• At 1.7 percent, rental vacancy rates in Melbourne remain well below the three to five percent levels that are considered to represent a balanced market. This indicates that there is a strong underlying demand for new housing.

Green shoots apparent

As this is happening, signs of recovery are taking hold.

Over recent months, the value of loans made to first homebuyers has been trending upward.

In October, the state recorded its second highest seasonally adjusted monthly volume of new home sales for the past two years. (The highest was recorded last April as buyers rushed to beat cost increases ahead of new requirements in the National Construction Code which came into effect in May.)

Approvals, too, are showing some encouraging signs.

Compared with the previous twelve months, the number of approvals which has been granted for detached house construction in Metropolitan Melbourne over the twelve months to September was up by 9 percent. (That said, over that same period, muti-unit approvals in metropolitan Melbourne were down by 14.9 percent whilst detached house approvals for Regional Victoria fell by 6.6 percent.)

Renovations also going strong

Turning to existing home renovations, King says that confidence to undertake significant home improvement is being underpinned by healthy property values as well as the economic and labour market resilience referred to above.

Indeed, the number of loans being taken out to undertake major renovations has trended upward over recent months.

Some barriers ahead

Granted, King acknowledges that the recovery will be subject to constraints.

Despite the resilience of the economy and labour market overall, the rate of unemployment has started to trend upward in Victoria to a slightly greater extent compared with what has been the case in other states. Should this continue, it may place some constraints upon household confidence and capacity to undertake new home purchases and existing home renovations.

Next, there are signs that the supply of ‘shovel ready’ vacant residential land may be limited and that land prices may be on an upward trend. This may act as a constraint upon greenfield development over the short and medium term notwithstanding that recent government announcements will have a positive impact in this area over the longer term.

Third, with the housing sector facing stiff competition for workers from a huge pipeline of civil construction works, skilled labour shortages will remain a constraint on new home building activity over the short and medium term.

Fourth, whilst the rate of growth of material price increases has eased, prices of key construction materials remain well above pre-pandemic levels.

Indeed, Producer Price Index data from the Australian Bureau of Statistics indicates that as of June this year, prices of terracotta tiles, timber windows, electrical cable and conduit, sand, copper pipes and fittings and timber doors remain higher compared with pre-pandemic levels to the tune of between 50 percent and 66 percent.

Fifth, as the Victorian Government grapples with significant debt over coming years, further constraints may arise in terms of government funding for essential infrastructure such as water or sewerage connections for new developments.

Finally, King says that headwinds in the multi-unit sector are particularly severe.

In addition to higher construction costs since the pandemic, multi-unit developers are facing greater credit constraints and more difficulty in obtaining sufficient volumes of pre-sales in order for banks and financiers to provide credit for projects.

This is a particular challenge for developers who operate in the lower to medium density segment of the market.

But  promise overall

Nevertheless, King stresses that the overall outlook remains bright.

“We do see good news ahead for Victoria generally,” King said.

“What you can see here is an upward trend over the next two years.

“What you can see here is an upward trend in both the detached and multi-unit sector. We do see it (multi-units) bouncing back. We think that confidence is returning again.

“We haven’t’ had an interest rate increase in a year, the unemployment rate is still incredibly low, the labour market is resilient, we are not seeing the rate of building material escalation that we have seen in the previous financial year, real incomes are stabilising that there are signs that real incomes are improving.

“And so the fundamentals are underpinning the return of market confidence. Investors have already been coming back but now the first home buyers are coming in and we are seeing more owner occupier activity generally speaking.

“We do see especially a good news story as far as the detached sector. We do see a little bit of a lag in the multi-unit sector.  We may not see a trough in multi-units until the first or second quarter new year – time will tell.

“But I want to reiterate that there is an upside risk to our forecast.

“We discussed in in the office just in this last week or two, my chief economist (HIA chief economist Tim Reardon) said, ‘make sure you tell that there is upside risk to our forecast’.

“We see in all likelihood that we are not going to undershoot our forecasts. More likely, Vic and Melbourne will overshoot our forecasts.”

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