An upturn in residential building will start next year but will be curtailed by a drop in underlying demand, worsening affordability, poor investor sentiment and subdued property prices, according to industry research company Macromonitor.

The company’s new report Australian Construction Outlook 2011 — Residential Building concludes that the next upturn will peak in 2012/13, at a level well below previous cyclical peaks, cementing an undersupply of dwellings in Australia for the next decade.

Modest residential building upturn

Macromonitor predicts weak property price growth and flagging investor interest will undermine the strength and duration of the next upturn in residential building.

The report’s author, consultant Jason Tyrrell, says: “Stronger growth in the early part of the upturn will lead to a flatter cycle in residential property prices, compared with the usual cycle where price growth is strongest as the upturn nears a peak. We believe price growth in most markets will be limited to household income growth, and this will subdue investor exuberance”.

Accordingly, the research outfit does not anticipate a fully fledged residential building boom.

“A lack of speculative development will limit new construction to below the 2003/04 peak” says Tyrrell.

“With gross rental yields remaining below six per cent in most states, interest rates of over eight per cent will significantly impact on investor confidence. Expectation of capital gain would need to be above five per cent per annum in real terms to trigger a wave of demand, and this level of capital growth is unlikely”.

“In a strengthening economy, equity markets will offer better returns for investors. Also, lending constraints, whilst gradually easing, will remain tighter than the conditions which characterised the 2003/04 peak in residential investment.”

Macromonitor is forecasting two years of growth in residential building in Australia during 2011/12 and 2012/13, reaching a peak of 170,200 dwellings commenced. Importantly, this upturn is only expected to occur in the states which are affected by stock shortage - New South Wales, Queensland, Western Australia and the Northern Territory.

The company then expects the combination of activity running above underlying demand and high interest rates to lead to another decline in activity during 2013/14 and 2014/15.

The long-term forecast is for a gradual reduction in the dwelling shortage, largely due to adjustments in household formation behaviour, alterations in the allocation of migration between the states and territories, and an increased preference for higher density dwellings.

Underlying demand

Macromonitor estimates that underlying demand in Australia is currently averaging 173,000 dwellings per annum (this is an estimate of average annual underlying demand for the period 2006 to 2011).

Tyrrel says: “Our analysis indicates that underlying demand for individual years peaked at 196,300 in 2008/09 and is expected to drop back to 144,400 in 2010/11.”

Flood and cyclone impact

The extra amount of residential activity in the forecasts as a result of the recent floods in Queensland, as well as Cyclone Yasi, is about 3,500 additional dwellings commenced. Most of the work undertaken throughout 2011, as a result of the floods, will be repairs and the rebuilding of existing premises. Almost 30,000 houses are estimated to have been impacted.

www.macromonitor.com.au