Australia building activity to plummet but set for mid 2020 recovery: BIS Oxford Economics

Australian building commencements are set for a deeper cycle than previously forecast; however, the sector is expected to recover strongly by 2020/21, according to building market analyst and economic forecaster BIS Oxford Economics.

According to the company’s Building in Australia 2019-2034 report, officially launched today, BIS Oxford Economics indicates the real value of national building commencements contracted an estimated 12 per cent in 2018/19 to A$109.8 billion (in constant 2016/17 prices), from the record peak reached the year prior.

The downturn has further to go with an additional eight per cent decline forecast for 2019/20, with the fall in residential building outweighing the growth expected in the non-residential sector.

Value of Total Building Commencements

According to the report, the combination of tougher lending practices and falling property prices has been a big hit to new property demand. The premium that is paid for new property makes it especially sensitive to negative price growth.

Robert Mellor, Managing Director at BIS Oxford Economics said, “FY2019/20 should represent the trough for total building, with a strong rebound anticipated from 2020/21 onwards as interest rate cuts, easing mortgage serviceability tests and first home buyer stimulus help facilitate a broad recovery.” 

“Total building activity is anticipated to climb near its previous peak over the coming five years.

“Strong population growth, a rising national dwelling stock deficiency and housing stimulus are set to provide considerable support to the residential building and renovation sectors, while non-residential building is projected to remain elevated at a high base over the medium term,” he added.

An upturn is in sight for the residential sector

Attached dwelling construction is estimated to have declined 24 per cent, while houses declined a more modest nine per cent.

However, Tasmania (+17 per cent) and the ACT (+22 per cent) bucked the trend, offsetting some of the falls elsewhere in total dwelling commencements.

Victoria (-23 per cent) saw the largest decline following a record peak the year prior, as the correction underway in New South Wales picked up pace, falling 14 per cent.

The national rate of property turnover has dropped back considerably over the past two years, in line with falling house prices. Tighter lending conditions triggered by the Banking Royal Commission battered buyer confidence and restricted access to finance.

Figure 2: Total Dwelling Commencements by State

Despite the severity of the downturn (33 per cent decline from peak to trough), national residential commencements will trough at 152,900 dwellings – a historically elevated level. This trough is well above the average of prior cycles back to the 1970s. 

“From somewhat of a balanced position, Australia’s dwelling stock deficiency will grow once again as rising undersupplies in Victoria, Queensland and Tasmania develop by 2020/21,” said Mellor. “We anticipate this pressure to facilitate growth in house prices and rents, helping create a renewed upswing in residential building starts through the early to mid-2020s.”

Over the four years to 2023/24, dwelling commencements are forecast to rise a cumulative 55 per cent to a peak of 236,650 in 2023/24. This new record level is projected to be the peak of the cycle.

Non-residential building commencements set to remain elevated

BIS Oxford Economics’ Building in Australia 2019-2034 report forecasts the value of non-residential building commencements, after a small step back in 2018/19, will hold at a record base of around $47 billion per annum through to 2022/23, with both private and public sector demand contributing to the positive outlook.

New South Wales and Queensland will lift to record levels in non-residential building over the next two years. Continued tightness in the Sydney office market should enable this sector to continue running at a high level, while a significant pipeline of major projects across defence, health and hospitality will support the Sunshine State.

Figure 3: Total Non-Residential Building Commencements by State

Implications: Total building commencements to fall further before growth re-emerges in all sectors by mid-2020

The continued contraction in dwelling commencements will outweigh the increase in non-residential building activity over the next 12 months, driving the total value of building starts down a cumulative eight per cent.

“Halfway through the residential downturn, our sights are now set on the recovery. The next pick up in new dwelling construction is expected to coincide with a continued buoyant level of non-residential investment and a turn in mining investment,” said Mellor. “Queensland and Western Australia are well positioned to lead the next residential upturn, ahead of New South Wales and Victoria.”

First home buyers and upgraders will initiate the recovery in residential commencements. As pressure on the dwelling stock increases, rental vacancy rates will tighten, and rental growth should accelerate. Once gross yields for residential property appear more favourable, investor demand is expected to start firing for both new and existing dwellings, but this is unlikely to occur until the second half of 2021.

However, if investors do not return to the market as expected, the momentum needed to sustain the recovery will be lacking.

“We could experience a deeper downturn before then, and a delayed recovery, if fundamental drivers of residential activity were to ease more than expected,” said Mellor. “A crisis of confidence surrounding build quality in the apartment market has the potential to weigh further on apartment construction over the short term, adding downside risk to the outlook.”