Building activity set to be a ‘drag’ on the economy

The advisory firm predicts a cumulative 10 per cent fall in building commencements over 2019 and 2020 (-6 per cent in 2019 and -4 per cent in 2020), driven by a 23 per cent correction in residential commencements.

BIS Oxford Economics said that while the 2019–20 “trough in commencements” will still be higher than any year prior to 2015–16, the company noted that downside risks — including high land costs, slowing migration and falling investor demand — could “spark a deeper correction”.

The advisory firm’s associate director of construction, maintenance and mining, Adrian Hart, said that he believes the building sector is “switching from being a strong growth driver to a drag on the economy”.

Mr Hart continued that the “very mild drop” in the value of residential commencements in 2017–18, which declined by 1 per cent in 2017 ($66.7 billion) and 3 per cent in 2018 ($64.5 billion), was “just the beginning”.

He said that the estimated decline would be especially felt in the investor-driven apartments segment, where commencements are expected to fall by 50 per cent in 2019–20.

“The key driver of the residential building downturn is falling investor demand. Domestic and foreign investor demand is weakening in the face of tougher lending criteria and increased foreign buyer charges. In turn, falling demand and rising supply (completions) is driving lower house prices, which also affects the attractiveness of housing as an investment asset,” Mr Hart said.

“While price falls are expected to be modest, the high concentration of investor demand in attached dwellings will see this part of the market fare worst of all over the next two years.”

However, the decline in investment property commencements means greater opportunities for first home buyers and upgraders or downsizers, but spiking land prices is still expected to constrain building commencements, according to BIS Oxford Economics.

“Land prices have spiked in Sydney and Melbourne in recent years, pricing many people out of the market for new houses,” Mr Hart said.

“This will act as a disincentive for new house building and pull buyers towards the established dwelling market.”

In 2017–18, the greatest year-on-year growth in the value of residential commencements was seen in Tasmania (25 per cent), Victoria (13 per cent), South Australia (9 per cent) and the Australian Capital Territory (6 per cent), offsetting falls in New South Wales (-9 per cent), Western Australia (-8 per cent) and Queensland (-7 per cent).

“While there are local pockets of oversupply, only Western Australia and Queensland are experiencing a significant net oversupply of dwelling stock at a state level,” Mr Hart said.

“With stock deficiency to start rising nationally again from 2019–20, we anticipate a renewed upswing in residential building starts through the early to mid-2020s.

“But we could experience a deeper downturn before then, and a delayed recovery, if fundamental drivers of residential activity, such as net overseas migration or investor demand, were to ease more than expected.”

Non-residential commencements to continue on growth trajectory

In contrast, non-residential commencements are expected to remain at a high level, with BIS Oxford Economics predicting a 5 per cent cumulative increase in commencements in 2019–20 (3 per cent in 2019 and 2 per cent in 2020).

In 2018, the total value of non-residential commencements was estimated at $46.4 billion, up by 20 per cent from the previous year. The figure is expected to reach $47.9 billion in 2019 and $48.7 billion in 2020. 

“We are still seeing strong investment cycles play out in the non-residential building market,” Mr Hart said.

“The resources boom drew industry and employment to the mining regions. The pendulum has swung back the other way over the past few years, with weakness in the resource sector, a lower dollar and improving service sector conditions supporting new commercial and industrial developments, particularly in New South Wales and Victoria.”

The growth in non-residential commencements in the upcoming years, however, will not outweigh the drop in residential commencements, according to BIS Oxford Economics.

“The strong growth in building commencements since 2012–13 provided a welcome boost for the Australian economy at a time when resources-related investment and construction activity fell heavily,” Mr Hart said.

“But 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.”

In April this year, the Housing Industry Association (HIA) suggested in its Housing Australia’s Future 2018 report that should the nation’s population continue to increase at the current rate while household income remains relatively stagnant, an average of 215,123 homes would need to be built every year until 2050 to reach a balance between supply and demand. This is compared to the “record” 233,544 dwellings built in 2016.

“This is a major problem for policymakers as the current supply of available building blocks in Australia is insufficient to sustain this growth and the inevitable outcome will be to push up the cost of land and therefore the cost of new housing,” HIA’s report said.

The association said in its report that the ongoing imbalance between supply and demand for housing since 2002–2003 has contributed to the rapid acceleration in property prices in Australia, and is ultimately the cause of the nation’s housing affordability crisis.

The residential housing industry body further noted that in 2017–2018, the supply and demand for new homes are at the “closest to equilibrium as [they have] been in the last 15 years” on a national level. In 2017, HIA estimated that new dwelling commencements across Australia exceeded 217,000.

“We recognise that the extraordinary volume of new commencements has ensured that, for the first time since 2003, the number of dwelling commencements in Australia is effectively fulfilling the needs of Australia’s growing population,” the HIA report stated.

[Related: Tighter credit slowing new home sales: HIA]