My shortlist (0 item)

    Australian building industry facing biggest crisis since GFC

    Residential commencements in the Australian building industry are expected to fall sharply over the next two years, driven mostly by weakening domestic and foreign investor demand. According to leading building market analyst and economic forecaster, BIS Oxford Economics, this decline will be the sharpest since the 2008 Global Financial Crisis.

    In their latest report ‘Building in Australia 2018-2033’, BIS Oxford Economics observes that the 2019/20 trough in commencements will still be higher than any year prior to 2015/16; however, downside risks including high land costs, slowing migration, and falling investor demand could spark a deeper correction.

    In terms of numbers, the real value of national building commencements rose an estimated five per cent in 2017/18 to A$118.5 billion (in constant 2015/16 prices), up 35 per cent in real terms since the last trough in 2011/12. However, building commencements are forecast to fall a cumulative 10 per cent over the next two years, led by a 23 per cent correction in residential starts.

    Adrian Hart, associate director of Construction, Maintenance and Mining at BIS Oxford Economics comments that the building sector is switching from being a strong growth driver to a drag on the economy. The residential building sector, particularly the investor-driven apartments segment, is set to fall 50 per cent; the very mild drop in residential commencements noticed in 2017/18 is just the beginning, he said.

    Attributing the residential building downturn to falling investor demand and rising supply, which is also driving down house prices, Hart said the attractiveness of housing as an investment asset is taking a hit.

    While the tepid interest from investors has opened up opportunities for first home buyers and upgraders/downsizers, the strong growth in land prices is likely to constrain house commencements.

    Rising land cost in Sydney and Melbourne in recent years has priced many people out of the market for new houses, says Hart. This will be a disincentive for new house building and pull prospective buyers towards the established dwelling market.

    Key highlights of the report:

    • States and territories that saw the greatest increases in recent years are forecast to see the greatest corrections in total dwelling starts, particularly the eastern states of New South Wales (-26 percent over the next two years), Victoria (-29 percent) and Queensland (-15 percent), as well as the ACT (-27 percent).
    • Despite the severity of the decline in the eastern states, national dwelling starts will remain at levels greater than any year prior to 2014 driven by sustained population growth and improving economic conditions.
    • Value of non-residential building commencements will rise a further five per cent over the next two years, following a cumulative increase of 51 percent over the past three years – due to reasonable economic conditions and a low interest rate environment.
    • New South Wales and Victoria are driving much of the boom in non-residential building, mainly office building (+100 percent over the past two years), and major prison and defence projects, other social and institutional building (+57 percent in 2017/18).
    • Activity in office and other social and institutional building commencements should remain at a relatively high level for the next few years, while other sectors such as health, transport building, entertainment and recreation, retail and accommodation are forecast to see higher levels of commencements over 2018/19 and 2019/20.
    • Non-residential building activity is expected to remain high until 2021/22, as economic conditions remain solid and a series of large scale transport infrastructure projects across the nation helps generate flow on investment.
    • Steep fall in dwelling commencements over the next two years will outweigh the marginal increases in non-residential building activity, driving the total value of building starts down a cumulative 10 per cent.

    With residential building activity set for a sharp decline along with its multiplier impacts on industries such as construction, manufacturing and retail, the Australian economy needs other investment drivers to support growth and employment. Hart says non-residential building and engineering construction projects offer such opportunities in the coming years.

    According to Hart, while governments are now more alert to the challenges than in the past, more could be done to coordinate investment in built assets and to avoid boom-bust cycles. Rising non-residential building activity will help offset the fall in residential work. While much of the sharp increase in non-residential building commencements in recent years has been driven by the private sector, he adds that government-sponsored projects across health, education, prisons, defence and entertainment are now coming to the fore.

    However, Hart cautions that it is important not to repeat the mistakes of the past – in particular, pushing a large cycle of publicly-funded works in already-heated local markets, which strain capacity, capability and ultimately value for money. Rather, governments should look for ways to smoothen the cycle while also satisfying long term growth and service provision objectives, he concluded.

    Read Comments
    Back to Top