Industry analyst and forecaster, BIS Shrapnel’s latest Regional Residential Building reports address the outlook for residential building in the three eastern states.

The studies have shown that throughout 2002/03 and 2003/04, population growth in many regional areas was quite high by historical standards. BIS Shrapnel believes that strong property markets in the capital cities provided liquidity to fund household shifts for lifestyle and affordability reasons. In addition, adverse housing affordability led many first home buyers to look outside the capital cities.

However, a key finding of the latest BIS Shrapnel analysis is that the outflow of households to regional areas likely receded in 2004/05. Residential property markets in the three eastern capital cities softened over the course of 2004/05, with turnover down by about a quarter. As a result, fewer households were in a position to finance a shift out of the metropolitan area.

The slowing residential property market in metropolitan areas weakened owner-occupier demand for new dwellings in some regional towns, particularly in coastal regions in proximity to the city: the Hunter and Mid-North Coast regions in New South Wales; Geelong and Gippsland regions in Victoria; and the Sunshine Coast and Hervey Bay in Queensland.

Study leader, Jason Anderson, says that there were pockets of expansion in demand for new dwellings, typically at a further distance from the capital cities. In particular, there is evidence of a slight shift in demand away from coastal areas and towards some inland towns, explains Anderson. Stronger growth in residential construction was evident in Glen Innes, Tamworth and Wagga Wagga in New South Wales; Shepparton, Ballarat and Traralgon in Victoria; and Toowoomba and the Darling Downs in Queensland.

According to Anderson, these trends reflect the continued edging of dwelling demand towards more affordable locations in the three eastern states. The pronounced migration shift towards regional coastal areas over the three years to 2003/04 bid up property prices and reduced housing affordability. As a result, household migration appears to have edged towards more affordable options away from the coastline.

Some coastal markets in the eastern states continued to enjoy strong expansion in dwelling demand in 2004/05 — in particular, the Richmond-Tweed region of New South Wales and north Queensland. These regions had attractions in terms of relative affordability, and so continued to show strong price growth in 2004/05, which attracted investor financed construction of new housing.

Looking forward, dwelling demand in metropolitan areas is expected to stabilise in 2005/06. Construction in Sydney, Brisbane and the Gold Coast is currently well below underlying demand, and affordability should gradually improve.

While relative affordability will remain a factor behind net migration to regional areas, its importance should moderate. BIS Shrapnel argues that demographic trends will become more important over the next few years. Household formation is currently dominated by persons in the 50–64 years (‘empty nesters’) and 65+ (‘retirees’) age groups. These households will tend to be in a better position to sell their home in subdued metropolitan markets, given that their accumulated equity will be a substantial proportion of property value. BIS Shrapnel believes that the demand from older households for coastal property in proximity to their ‘home’ city will cause a rebound in dwelling construction in some regions in 2005/06.

For investors, BIS Shrapnel argues that attention will shift towards rental yield and away from capital gains. Markets that experience an extended period of under supply of new dwellings will tend to have strong rental growth. Analysis indicates that there is a pronounced deficiency of dwellings in some regions.

Amongst the capital cities in the eastern states, BIS Shrapnel finds that Brisbane has the largest deficiency of dwellings, and the highest rental growth. On the other hand, a marginal surplus of dwellings exists in Melbourne, primarily in the inner city apartment market.

The situation in Sydney is changing rapidly. Dwelling construction in Sydney will be well below underlying demand in 2005/06 and 2006/07, and a substantial deficiency is developing, which should trigger strong growth in average rentals in 2006/07. However, with rental yields at long-term low levels, this process will take some time to stimulate a recovery in investor demand for new dwellings, which we do not anticipate until 2007/08.

In Victoria, BIS Shrapnel did not find evidence of a significant deficiency of dwellings in many regions. The exceptions appear to be the Barwon and Ovens-Murray regions. The strong growth in property prices in some regional towns in Victoria has attracted investor finance for construction, which is expected to create a modest degree of excess supply. As a result, a downturn in dwelling construction in most Victorian regions in 2005/06 is forecast.

Source : Building Product News