Australia | Jul 23 2018
A steep fall in residential dwelling commencements over the next two years is likely to overshadow the more modest increase in non-residential construction, a report from BIS Oxford Economics suggests.
-Fall in residential building commencements to accelerate sharply
-Most severe declines in prices expected in medium-high-density where investor demand was concentrated
-Non-residential building activity likely to remain at a high base until 2021/22
By Eva Brocklehurst
The boom in Australian building approvals may be over, with a resultant headache for the broader economy looming. BIS Oxford Economics expects the steep fall in dwelling commencements that is likely over the next two years will overshadow any increase in non-residential building and reduce the total value of building starts by -10%.
In the researcher's Building In Australia 2018-2033 report other investment drivers are slated as necessary for economic growth and employment. The downturn in residential building commencements is expected to accelerate sharply and fall -50% over the next two years, sparked by investor-driven apartments. Investor demand is weakening in the face of tougher lending criteria and increased charges on foreign buyers.
Falling demand and rising supply are leading to lower house prices and this reduces the attractiveness of housing as an investment. The most severe declines in prices are expected to be where there is a high concentration of investor demand, such as medium-high density dwellings.
While the retreat by investors has opened up opportunities for first home buyers and those upgrading or downsizing, strong growth in land prices is likely to constrain housing commencements, the report suggests. This is likely to act as a disincentive for new house building and pull buyers towards the established dwelling market.
Population Growth Supportive
Much of the decline in new residential construction will be in the eastern states and, overall, national dwelling starts are still expected to remain at levels greater than any year prior to 2014, supported by sustained population growth and improving economic conditions.
The states and territories that experienced the greatest increases in recent years are expected to sustain the largest corrections in total dwelling starts. NSW dwelling starts are expected to decrease -26% over the next two years, Victoria -29%, Queensland -15% and the ACT -27%.
The analysis suggests only Western Australia and Queensland are experiencing a significant net oversupply of dwellings stock at a state level. Stock deficiencies are expected to start rising nationally again from 2019/20 and a renewed upswing in residential building commencements is expected in the early to mid 2020s.
However, BIS Oxford associate director, Adrian Hart, warns a deeper downturn could be experienced before then – and a delayed recovery – if fundamental drivers of residential activity such as net overseas migration or investor demand were to dissipate substantially.
Non-Residential Building
The value of non-residential building commencements is likely to rise a further 5% over the next two years following cumulative increases of 51% over the past three years. NSW and Victoria are driving much of this boom.
Office buildings stand out, with the report noting 11 projects valued at or above $250m have commenced construction. This is supported by a number of prison and defence projects as well as other social and institutional building. Activity in these markets should remain at relatively high levels for the next few years and there are also higher levels of commencements forecast for health, transport, entertainment, retail and accommodation.
BIS Oxford anticipates non-residential activity will remain near this high base until 2021/22 as economic conditions remain firm and there are large-scale transport infrastructure projects that generate flows for investment.
While increasing non-residential building activity will help offset the fall in residential work, much of the sharp increase has been driven in recent years by the private sector, although government sponsored projects across health, education, defence and entertainment are coming to the fore.
The report advises that, in this environment, it is important not to repeat the past mistake of pushing through a large volume of publicly-funded works in already heated local markets that will strain capacity and, ultimately, value for money, and calls for governments to look for ways to smooth the cycle while also satisfying long-term growth and the provision of services.
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