Australia's residential building industry is inching closer to the light at the end of a dark tunnel, with the downturn in construction poised to wind up this year, according to the latest forecast by the Housing Industry Association (HIA).

The industry felt its sharpest decline in commencements last year when building starts fell from 225,061 to 174,770. This slowdown was one of the reasons behind the stalling in the overall economy, said Tim Reardon, chief economist at HIA.

"Despite this whopping contraction, we believe that the cycle had just about run its course and the overall housing market reached a turning point at the end of 2019, buoyed by interest-rate cuts and house price growth," he said.

However, Reardon said it is unlikely for the next upturn in home-building activity to reach the highs recorded during the boom years from 2014 to 2018.

There are a few reasons why the upswing might not be as stellar as the one seen a few years back: First is the rate at which the population is growing. While the population is growing steadily at less than 400,000 per annum, recent gains pulled back from previous highs.

"This steadier rate of population growth along with much of the underbuild, now largely worked down, means the pressure for new builds won't reach the same fever pitch," Reardon said.

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Another reason was the credit squeeze. While regulators have since loosened some restrictions, tighter lending standards are still affecting homeownership rates.

"Typically, any drop in owner-occupier demand for new homes would likely be filled by investors, except this time round we wouldn't count on the same wave of foreign investment, given the barriers they now face with punitive rates of stamp duty when entering the domestic housing market. As a consequence, we expect upward pressure on rents," Reardon said.

Given these factors, Reardon projects the growth in construction to be a "very modest affair".

HIA figures expect the current dynamics to affect the construction of multi-units. During the boom years, multi-unit starts were, on average, hitting 105,000 per annum. For this year, 75,750 multi-unit homes are expected to commence, followed by 77,390 next year, and 80,980 by 2022.

In terms of detached housing, commencements are slated to hit 101,390 this year, 102,750 by 2021, and 104,350 in 2022. These figures are lower than the average 117,000 per annum detached-housing starts during the 2014-2018 boom period.

Reardon said the home-building system needs a strong national economy to continue to grow.

"Unfortunately, international factors are likely to impact on the volume of home building in Australia over the medium term. The effects of trade and tourism restrictions with China pose a material downside risk to our forecasts. As these effects are still emerging we have not factored them into our forecasts," he said.

A separate report from Master Builders Australia said new home building starts will likely bottom out during 2020/21 at around 159,000. Dwelling commencements are expected to hit above the 200,000 mark by 2024/25.

“Australia needs around 200,000 new homes to be built each year to meet future population growth. Our latest forecasts indicate that we are set to fall considerably short of this requirement for a few years yet,” said Shane Garrett, chief economist at Master Builders Australia.