It’s no secret that for quite some time now, residential real estate has been keeping the Australian economy floating along in relatively calm waters, despite the fact that we (like everyone else) are adrift amidst an often tumultuous global sea of fiscal change.
So what happens when the housing boom that has kept the economy motoring along, starts to slow down, and sputter, and lose some momentum? And what happens if that slow down happens sooner than anticipated?
Agencies say end is nigh
Last week, building market analyst and economic forecaster BIS Oxford Economics, released a report entitled Building in Australia 2017-2032, which details the rise and fall of real estate construction activity in recent times.
The report shows that since hitting a peak in 2015/16 at a phenomenal $107.3 billion, building commencements have been on the decline, and are about to hit a significant downward dive.
BIS Associate Director of Construction, Maintenance and Mining Adrian Hart, says this noticeable descent in the volume and value of building commencements, will be most obvious in the new apartment sector.
“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,” said Hart.
“BIS expects the total residential market to fall by around 31% over the next three years, but the decline in the number of private high-density apartments getting underway nationally will be closer to 50%.”
While BIS suggests the looming housing slump will be reminiscent of residential property downturns in the mid-90s, and with the introduction of the GST earlier this century, the outlook from other forecasters and industry watchdogs paints a slightly more favourable picture, of a, well…slower, slow down.
Housing Industry Association’s senior economist Shane Garrett, says that high volumes of housing construction will continue through to at least 2019, even though there’s been a decline in new dwelling commencements for 2016-17 of 4.5%, compared to the previous year.
According to a recent HIA Housing Outlook Report, a further fall in construction numbers of 10.7% is predicted for 2017-18.
From that point however, it’s forecast that the bottoming out anticipated in 2019, will in no way come close to any serious fall in new dwelling completions, or in housing demand for that matter.
“Solid population growth, very low interest rates and consistent gains in employment do mask some concerning trends with respect to underemployment and decelerating GDP growth,” said Garrett.
“Combined with another layer of obstacles to foreign investor participation in the housing market, new home building volumes are set to move downwards over the next couple of years.”
But Garrett is quick to qualify that this downward cycle is different than we’ve previously seen, with the ‘bottoming out’ predicted for 2019, still expected to be higher than the peak of the boom in 2010, and the peak of the boom in 2015-16.
“The housing boom was not consistent across Australia and now, with NSW and Victoria cooling, all indicators are that the market is well past its 2016 peak when over 231,000 new homes were commenced,” said Garrett.
“Even though new dwelling starts will decline over the next couple of years, the annual volume of new home starts is not likely to fall below 170,000 at any stage. By any standard, this is still a very elevated level of activity.”
At the Reserve Bank’s August board meeting, Governor Phillip Lowe proclaimed that the “current high level of residential construction is forecast to be maintained for some time, before gradually easing.”
Half full or half empty?
BIS managing director Robert Mellor begs to differ with all this relatively optimistic forecasting, suggesting it “may not be as rosy as all that.”
Mellor says with the exception of Victoria and New South Wales, dwelling demand/supply analysis indicates that all states are “either in balance or oversupply.”
“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.”
Another issue that could arise concurrently with an apartment construction slowdown, says Mellor, is a change in investor sentiment, given how much skin this group of buyers has (as a critical mass) in the new apartment sector particularly.
This predicted slowdown begs the question then…what will arise to fill the significant economic hole that a housing slump would leave in the Australian economy?
“With residential building activity in particular now set for a sharp decline – along with its multiplier impacts on industries such as construction, manufacturing and retail – the Australian economy will need new investment drivers to support growth and employment,” said Hart.
Commercial and industrial domination won’t last
While BIS is forecasting a further rise in the already rambunctious, non-residential real estate sector, it’s not expected that commercial and industrial construction will remain the new economic heroes of the day for too long.
“Improved economic conditions along the eastern seaboard are driving new commercial and industrial developments, particularly in the New South Wales and Victoria,” said Hart.
Indeed, commercial property commencements have increased by 25% in the past two years, even as residential construction slows.
“Offices, retail and accommodation commencements have been very strong, although the latter two segments will run out of puff in coming years given the project pipeline and fundamental drivers.”
BIS admits that the health and education are the sectors set for future growth in commercial commencements, with a wide range of hospital and tertiary education projects in the pipeline.
However, the total value of non-residential building commencements, much like the housing sector, is forecast to ease later this decade.
The take home message is, as always, watch where you’re parking your investment dollars. Sometimes new and shiny doesn’t equate to more money in the bank.