Building market will decline over next three years – report

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Australia’s building market, one of the recent drivers of growth in the national economy, will shift into reverse over the next three years led by a collapse in residential starts, according to BIS Oxford Economics.

In its new report, Building in Australia 2017-2032, BIS indicates that the value of national building commencements had peaked in 2015-16 at $107.3bn (in constant 2014-15 prices), up 22% in real terms since the end of the resources investment boom in 2012-13.

While a similar value of commencements is estimated for 2016-17, the report forecasts a cumulative 17% decline in the real value of commencements over the three years to 2019-20.

“The record breaking residential building boom is already turning, offsetting growth in starts for non-residential building through 2016/17,” said Adrian Hart, associate director of construction, maintenance, and mining at BIS Oxford Economics. “Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, as supply catches up to underlying demand.”

“BIS expects the total residential market to fall by around 31 per cent over the next three years, but the decline in the number of private high density apartments getting underway nationally will be closer to 50 per cent. Overall the slump will be similar in percentage terms to the residential downturns in the mid-1990s and the introduction of the GST in 2000/01.”

The BIS outlook for residential building activity is more bearish than that found in the 2017-18 Commonwealth Budget, as well as the Reserve Bank’s August statement accompanying its decision to keep interest rates at a record low 1.5%. In the RBA’s statement, Governor Philip Lowe said that the “current high level of residential construction is forecast to be maintained for some time, before gradually easing”.

“It may not be as rosy as all that,” said Robert Mellor, managing director at BIS Oxford Economics.

“Our dwelling demand/supply analysis indicates that all states, with the exception of Victoria and New South Wales, are either in balance or oversupply,” Hart said. “With dwelling completions running ahead of underlying demand over the next two years, Australia will swing to a significant national residential stock surplus by 2018/19 despite New South Wales still facing a significant stock deficiency.”

“While high density dwellings do take longer to complete than traditional detached dwellings, when the end comes it will be very swift,” Mellor said. “The high proportion of investor activity is another risk factor as investor sentiment can turn quickly.

“Overall, we expect 2017/18 will be the peak in high density residential completions, but that part of the market will slump around 50 per cent in the subsequent two years. By contrast, a milder decline is forecast for detached houses. The saving grace is that the floor in residential commencements is likely to be higher than in previous busts.”

In contrast to the residential building market, BIS forecasts the value of non-residential building commencements to rise further in 2017-18, following a cumulative increase of 25% over the past two years. However, the total value of non-residential building commencements is expected to ease later this decade.


Related Stories:
Total Building Approvals Up In June
Residential Building Boom Reaches Crescendo

 

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