Industry analyst and economic forecaster, BIS Shrapnel expects the record-beating residential building boom to soon run out of steam.
According to the company’s Building in Australia 2015-2030 report, national dwelling commencements are estimated to have reached their peak over 2014/15 and will begin to gradually decline from this level in the coming years.
According to Dr Kim Hawtrey, Associate Director with BIS Shrapnel, the residential building segment recorded strong growth over the past few years, with total dwelling starts estimated to have reached just over 210,000 in 2014/15. From this all-time record high, BIS forecasts that national activity will begin trending down over the next three years, with the currently thriving apartments sector leading the way down.
Observing that the current strong growth was driven by a sizeable dwelling stock deficiency coupled with record-low interest rates, Hawtrey warned that the national market will shift into a mild oversupply by 2018. As population growth slows and construction activity remains strong, new supply will begin to outpace demand, gradually eroding the national deficiency of dwellings with signs of oversupply being seen in some key markets.
Based on BIS Shrapnel assumptions about household formation per thousand head of population, the Building in Australia 2015-2030 report estimates the national dwelling stock deficiency reached a peak of around 108,000 dwellings by June 2014. After a strong 2014/15 this has slipped back to approximately 85,000 as at June 2015.
Despite reaching its peak in 2014/15, new dwelling starts will continue to track at historically high levels over the coming years with low interest rates continuing to support demand, and driven by investors and upgrader/downsizers.
Residential building outlook
According to the Building in Australia 2015-2030 report, housing starts are estimated to have grown by 16 per cent in 2014/15 to reach a record high of 210,000. The stellar result was underpinned by 24 per cent growth in the other dwellings sector, which is estimated to have peaked at 95,500, while detached houses delivered a solid result of 114,600 new starts.
From this level BIS Shrapnel expects to see activity begin to fall in 2015/16 (-5 per cent) as pressure is gradually alleviated in some markets. The decline will be led by the other dwellings sector as it falls back from its unsustainable high, while detached house starts will remain flat. Affordability concerns will begin to emerge in the key Sydney and Melbourne markets, which will limit demand despite interest rates remaining at record-low levels.
New South Wales, Victoria and Queensland led the way in 2014/15, but only New South Wales is expected to maintain growth into 2015/16 off the back of a strengthening economy and a persistent deficiency of dwellings. Queensland will remain relatively flat around a strong level as its market moves towards balance, while Victoria will experience the most significant reversal of the three eastern states (-7 per cent).
The sharpest decline of the five major states will be seen in Western Australia (-13 per cent) as its economy slows in the wake of the mining boom and population growth softens sharply. This will see a significant stock deficiency quickly evaporate, and with vastly reduced pressure in housing demand in the key Perth market, subsequently building activity will soften considerably.
Non-residential building outlook
Following a sharp decline in 2014/15 (-13 per cent) non-residential building commencements are expected to bounce back in 2015/16 (+10 per cent) to $33.42 billion (constant 2012/13 prices). Growth will be driven by the commercial and industrial sectors (+17 per cent) with retail (+29 per cent) in particular performing well. Social and institutional building (+1 per cent) will remain mostly flat, although other than a sizeable fall in the other social and institutional sector (-35 per cent), most sectors will perform reasonably well as health (+17 per cent), entertainment and recreation (+12 per cent) and education (+6 per cent) all record solid results.
The overall profile for non-residential building over the forecast horizon is mostly flat, with activity fluctuating between $30 and $35 billion.
Hence, after a further six per cent improvement in 2016/17 BIS Shrapnel expects to see activity slip back in 2017/18. Beyond that, a healthy upwards growth trend will return as improving economic conditions begin to set in. However, this will only take activity to roughly $35 billion by 2019/20, on par with the 2013/14 result.
Total building outlook: summary
According to the Building in Australia 2015-2030 report, the total value of all national building commencements is estimated to have grown by four per cent in 2014/15. Strong growth in new residential building activity (+17 per cent) was sufficient to outweigh the decline in non-residential building (-13 per cent), with other dwellings (+27 per cent) in particular leading the way. Alterations and additions also provided modest support, increasing by three per cent.
The value of total building commencements will then flatten over 2015/16 and 2016/17 as increases in non-residential building offset declines in the residential sector. Total activity will slump in 2017/18 (-12 per cent) as all sectors experience declines in response to rising interest rates. Moderate growth will then return over 2018/19 and 2019/20.