Residential building recovery to transition from “high rise to bungalows” as NSW picks up Victoria’s slack: BIS Shrapnel

The outlook for the residential building sector is mixed with growth expected in the previously underperforming states of NSW, Queensland and WA, but Victoria to weaken as the Melbourne apartment market cools.

Overall, residential building is forecast to decline 2% in the 2013 financial year, before picking up 9% in 2014/15 and 4% in 2015/16.

Nationally, the recovery will see private detached house starts grow by 2% in 2013/14 and 12% in 2014/15. Another lift of 6% will follow in 2015/16.

At the same time private multi-residential dwelling starts will initially fall by 5% in 2013/14 as the Melbourne apartment market cools, before a bounce back of 5% begins in 2014/15 and a further 1% rise the year after.

However, then a cyclical decline will set in with a 5% contraction in 2016/17 followed by an 8% fall in 2017/18.

“[2013/14] will be a year of change in the mix – from Victoria to NSW, and from high rise to bungalows – before gaining strong traction the following year, in 2014/15,” says Dr Kim Hawtrey, associate director at BIS Shrapnel and author of its Building in Australia 2013 report.

The report forecasts a critical 12 month period for the Australian economy as it transitions away from mining investment into non-mining sectors.

“We’re in for a real nail biter,” says Hawtrey.

“We see an upswing in building but it will be uneven and slower to get going than usual.

“The next 12 months will be a critical test of how quickly the construction sector can take on more of the heavy lifting, and the Australian economy will remain balanced on a knife edge.”

The strongest upswings will occur in the prevously underperforming NSW new home building market and in the the two ‘mining’ states of Western Australia and Queensland.

However, Victoria, South Australia, Tasmania and the ACT are all expected to post declines in 2012/13 and this will continue into 2013/14.

Victoria will undergo an “inevitable correction following several record years of phenomenal home building".

“These markets are generally in oversupply, notably Victoria,” says Hawtrey. 

Overall, BIS Shrapnel says that building, especially home construction, is not responding to low interest rates as might be expected.

“Home building has been punching below its weight and normally low mortgage rates would be stimulating the sector toward clear recovery by now.

"But the antibiotics are taking longer to work this time around.

“High household debt, concerns about the global economy, planning restrictions in some states and lack of land supply are among the factors that explain this new phenomenon," says Hawtrey.

Figures for the financial year to date has residential outperforming expectations over 2012/13, with strong results in the September and December 2012 quarters boosting the calendar 2012 result to 147,970 commencements.

The emergence of tentative growth in NSW, Queensland, Western Australia and the Northern Territory as well as a softer than anticipated fall in Victoria are behind the positive results.

Leading indicators suggest that growth in these markets will continue and this fits with BIS Shrapnel’s expectations based off its longer term analysis.

However, despite the low interest rates (set to remain low for the immediate future) and improved housing affordability, BIS Shrapnel notes that the recovery in residential building activity has not been as strong or as quick to set in as some commentators would have expected.

“Although the Australian economy has shown more resilience than many other developed economies, it has faced its own struggles,” says Hawtrey.

“Outside the resources sector, activity has been subdued, with many industries struggling with the higher dollar and the public sector pulling back on spending.

“As investment in the mining sector begins to decline economic growth will weaken and unemployment will pick up. This has already begun to happen and is weighing heavily on confidence.

BIS Shrapnel expects that a fall in residential building in Victoria’s will “basically neutralize the rise in NSW” resulting in an overall 9% pick-up in residential construction in 2014/15 and 4% in 2015/16.

“Momentum will build in the undersupplied states of New South Wales, Queensland and Western Australia driving the national total, whilst declines in Victoria will level out, and South Australia and Tasmania will return to growth off their low levels,” says Hawtrey.

The overall outlook for building (residential and non-residential) is weak with the value of national building commencements is forecast to grow 3% in 2013/14.The sector will then stabilise in 2015/16 (0%) and record falls in 2016/17 and 2017/18.