New multi-residential building to plummet 50 per cent by 2020
Announcement posted by Oxford Economics 01 Aug 2016
A strong pipeline of dwelling completions coupled with slowing population growth is seeing oversupplies emerge, setting the stage for a decline in new activity – the first in four years
Monday, August 1, 2016 – The record-beating residential building boom will translate into a tsunami of supply coming on stream over the next twelve months and new home building will soon begin to run out of steam, according to leading market analyst and economic forecaster, BIS Shrapnel.
According to its Building in Australia 2016-2031 report, national dwelling commencements are estimated to have reached their peak over 2015/16 and will begin to decline from this level in the coming year.
“After recording strong growth during the past four years, we estimate that total dwelling starts reached an improbable 220,100 in 2015/16, an all-time high,” said Dr. Kim Hawtrey, Associate Director at BIS Shrapnel. “From this level, national activity is forecast to begin trending down over the following three years, with the high-flying apartments sector leading the way down.”
While a sizeable dwelling stock deficiency coupled with record low interest rates drove building activity to its current highs, Dr. Hawtrey argues that almost all major markets will soon shift into oversupply. “Low interest rates have unlocked significant pent up demand and underpinned the current boom in activity, but with population growth slowing and a strong backlog of dwellings due for completion, new supply will outpace demand,” said Hawtrey. “This will see the national deficiency of dwellings gradually eroded and most key markets will begin to display signs of fatigue.”
New South Wales is an exception - it will remain undersupplied for some time yet. But even there, BIS Shrapnel expects a slowdown in home building too. “Sydney is up against an affordability ceiling as well as constraints on site availability. Investor demand is cooling, and the city will see a surge in new supply coming on stream over the next 1-2 years” he said.
In the company’s latest forecasts, net overseas migration is expected to continue its recent downward trend for the next few years in response to soft economic growth post-mining boom, resulting in a weaker outlook for population growth. However residential building activity has continued to grow and new dwelling completions have pushed above the underlying demand for dwellings.
Based on BIS Shrapnel assumptions about household formation per thousand head of population, the Building in Australia report estimates the national dwelling stock deficiency reached a peak of around 117,000 dwellings by June 2014. After a strong boost to home construction this efficiency has roughly halved to approximately 58,000 as at June 2016.
Importantly, despite reaching their peak in 2015/16, new dwelling starts will continue to track at a historically high level over the next twelve months. Low interest rates will continue to support demand, with momentum expected to remain a force across the national market.
“While we are forecasting a fall in activity from its current peak, this will mostly be felt in the higher density segment of the market,” said Hawtrey. “After climbing to over 100,000 starts there will be an inevitable adjustment in the attached dwellings sector as they move back to more sustainable levels. New commencements of multi-residential dwellings are forecast to fall by 50 per cent over the next four years, from around 107,000 currently to just 53,800 by 2019/20.”
Investors, who drove the history-making apartment boom until very recently, will no longer fuel the market like they once did. “With investors facing finance restrictions and first home buyers sidelined, it will be up to upgraders/downsizers to help cushion the decline in activity,” said Hawtrey. “But we’re not confident, given that the national stock deficiency will have been largely satisfied by 2017.”
The Building in Australia report provides a respected and independent medium-term assessment of the Australian building industry outlook. It contains demographic trends and detailed forecasts on the residential (housing, other dwellings), non-residential (commercial, industrial, social and institutional) sectors, and the alterations and additions market, by state. The report covers key drivers for housing demand, population trends, the outlook for building material costs, and the non-residential building cycle.
Residential building outlook
According to the Building in Australia 2016-2031 report, housing starts are estimated to have grown by a further 3 per cent in 2015/16 to reach a new high of 220,100. The stellar result was underpinned by 7 per cent growth in the multi-residential dwellings sector which is estimated to have peaked at 107,100, while detached houses delivered a solid result of 112,950 new starts.
From this level BIS Shrapnel expects to see activity begin to fall in 2016/17 (-16 per cent) as pressure goes out of most markets. The decline will be led by the high rise sector (4+ storeys) as it slumps back from its unsustainable high, while medium density (1-3 storeys) and detached house starts will ease down more gently. Affordability concerns will inhibit the key Sydney and Melbourne markets which will limit demand despite interest rates remaining at record low levels.
New South Wales, Victoria and Queensland led the way in 2015/16, but none is expected to maintain this growth into 2016/17, not even New South Wales despite a strengthening economy and a persistent deficiency of dwellings. Victoria will experience the most significant reversal of the three eastern states (-17 per cent). Off such a sustained period of strength, Victoria has been over-building relative to demand and it is estimated that key areas of the Melbourne market have moved into oversupply.
Western Australia will experience the sharpest decline of the five major states (-19 per cent) in 2016/17 as its economy continues to slow in the wake of the mining boom and population growth softens. This will see a significant stock surplus quickly build up and with vastly reduced pressure in the key Perth market, building activity will soften considerably.
Over the medium term, national activity will slow steadily to 145,000 new starts by 2018/19, with oversupply in key markets acting to limit new development despite continuing low interest rates. From this level a new, more modest upturn will begin as population growth starts to pick up, but not until 2020/21.
Non-residential building outlook
Following a sharp decline in 2014/15 (-19 per cent) non-residential building commencements bounced back in 2015/16 (+6 per cent) to $30.43 billion (constant 2013/14 prices). Further growth is expected in 2016/17 (+7 per cent) driven by the commercial and industrial sector (+13 per cent) with office and transport in particular performing well, while social and institutional building (-1 per cent) will remain mostly flat. More growth is predicted for 2017/18 (+7 per cent), this time driven by the social and institutional sector (+17 per cent), especially in entertainment and recreation, and education.
Despite some lumpiness due to the impact of major projects coming through the numbers, the overall profile for non-residential building over the forecast horizon is mostly flat, with activity fluctuating between $30 and $35 billion. Despite a forecast modest improvement, economic conditions will remain subdued and it will take time for capacity constraints to build and underpin a new round of development.
Hence, after further improvement in 2016/17 and 2017/18 we expect to see activity slip back in 2018/19 (-4 per cent). By the end of the decade a healthy upwards growth trend will return as improving economic conditions begin to set in. However this will only take activity to roughly $35.5 billion by 2020/21, a level on par with the 2013/14 result.
Total building outlook: Summary
According to the Building in Australia 2016-2031 report, the total value of all national building commencements is estimated to have grown by 3 per cent in 2015/16. Modest growth in new residential building activity combined with growth in non-residential building generated the result, with multi-residential dwellings in particular leading the way. Alterations and additions provided no support, decreasing.
The value of total building commencements will then fall over the next three years, as increases in non-residential building are outweighed by declines in the residential sector. Total activity will finally improve in 2020/21 as all sectors experience an improvement.
About BIS Shrapnel
BIS Shrapnel is Australia's leading provider of industry research, analysis and forecasting services. BIS Shrapnel helps clients better understand the markets in which they operate, through reliable and detailed market data, analysis of developments and drivers and thoroughly researched forecasts.
BIS Shrapnel compiles accurate, clearly explained and detailed information on industry sectors, markets and industries in which their clients operate. BIS Shrapnel provides market size and segmentation data, market shares, consumer attitudes and supplier reputation information, and regularly conducts both business-to-business and consumer research.
Over the company’s 52-year history, BIS Shrapnel has built up a strong level of expertise and unique methodologies for forecasting.
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According to its Building in Australia 2016-2031 report, national dwelling commencements are estimated to have reached their peak over 2015/16 and will begin to decline from this level in the coming year.
“After recording strong growth during the past four years, we estimate that total dwelling starts reached an improbable 220,100 in 2015/16, an all-time high,” said Dr. Kim Hawtrey, Associate Director at BIS Shrapnel. “From this level, national activity is forecast to begin trending down over the following three years, with the high-flying apartments sector leading the way down.”
While a sizeable dwelling stock deficiency coupled with record low interest rates drove building activity to its current highs, Dr. Hawtrey argues that almost all major markets will soon shift into oversupply. “Low interest rates have unlocked significant pent up demand and underpinned the current boom in activity, but with population growth slowing and a strong backlog of dwellings due for completion, new supply will outpace demand,” said Hawtrey. “This will see the national deficiency of dwellings gradually eroded and most key markets will begin to display signs of fatigue.”
New South Wales is an exception - it will remain undersupplied for some time yet. But even there, BIS Shrapnel expects a slowdown in home building too. “Sydney is up against an affordability ceiling as well as constraints on site availability. Investor demand is cooling, and the city will see a surge in new supply coming on stream over the next 1-2 years” he said.
In the company’s latest forecasts, net overseas migration is expected to continue its recent downward trend for the next few years in response to soft economic growth post-mining boom, resulting in a weaker outlook for population growth. However residential building activity has continued to grow and new dwelling completions have pushed above the underlying demand for dwellings.
Based on BIS Shrapnel assumptions about household formation per thousand head of population, the Building in Australia report estimates the national dwelling stock deficiency reached a peak of around 117,000 dwellings by June 2014. After a strong boost to home construction this efficiency has roughly halved to approximately 58,000 as at June 2016.
Importantly, despite reaching their peak in 2015/16, new dwelling starts will continue to track at a historically high level over the next twelve months. Low interest rates will continue to support demand, with momentum expected to remain a force across the national market.
“While we are forecasting a fall in activity from its current peak, this will mostly be felt in the higher density segment of the market,” said Hawtrey. “After climbing to over 100,000 starts there will be an inevitable adjustment in the attached dwellings sector as they move back to more sustainable levels. New commencements of multi-residential dwellings are forecast to fall by 50 per cent over the next four years, from around 107,000 currently to just 53,800 by 2019/20.”
Investors, who drove the history-making apartment boom until very recently, will no longer fuel the market like they once did. “With investors facing finance restrictions and first home buyers sidelined, it will be up to upgraders/downsizers to help cushion the decline in activity,” said Hawtrey. “But we’re not confident, given that the national stock deficiency will have been largely satisfied by 2017.”
The Building in Australia report provides a respected and independent medium-term assessment of the Australian building industry outlook. It contains demographic trends and detailed forecasts on the residential (housing, other dwellings), non-residential (commercial, industrial, social and institutional) sectors, and the alterations and additions market, by state. The report covers key drivers for housing demand, population trends, the outlook for building material costs, and the non-residential building cycle.
Residential building outlook
According to the Building in Australia 2016-2031 report, housing starts are estimated to have grown by a further 3 per cent in 2015/16 to reach a new high of 220,100. The stellar result was underpinned by 7 per cent growth in the multi-residential dwellings sector which is estimated to have peaked at 107,100, while detached houses delivered a solid result of 112,950 new starts.
From this level BIS Shrapnel expects to see activity begin to fall in 2016/17 (-16 per cent) as pressure goes out of most markets. The decline will be led by the high rise sector (4+ storeys) as it slumps back from its unsustainable high, while medium density (1-3 storeys) and detached house starts will ease down more gently. Affordability concerns will inhibit the key Sydney and Melbourne markets which will limit demand despite interest rates remaining at record low levels.
New South Wales, Victoria and Queensland led the way in 2015/16, but none is expected to maintain this growth into 2016/17, not even New South Wales despite a strengthening economy and a persistent deficiency of dwellings. Victoria will experience the most significant reversal of the three eastern states (-17 per cent). Off such a sustained period of strength, Victoria has been over-building relative to demand and it is estimated that key areas of the Melbourne market have moved into oversupply.
Western Australia will experience the sharpest decline of the five major states (-19 per cent) in 2016/17 as its economy continues to slow in the wake of the mining boom and population growth softens. This will see a significant stock surplus quickly build up and with vastly reduced pressure in the key Perth market, building activity will soften considerably.
Over the medium term, national activity will slow steadily to 145,000 new starts by 2018/19, with oversupply in key markets acting to limit new development despite continuing low interest rates. From this level a new, more modest upturn will begin as population growth starts to pick up, but not until 2020/21.
Non-residential building outlook
Following a sharp decline in 2014/15 (-19 per cent) non-residential building commencements bounced back in 2015/16 (+6 per cent) to $30.43 billion (constant 2013/14 prices). Further growth is expected in 2016/17 (+7 per cent) driven by the commercial and industrial sector (+13 per cent) with office and transport in particular performing well, while social and institutional building (-1 per cent) will remain mostly flat. More growth is predicted for 2017/18 (+7 per cent), this time driven by the social and institutional sector (+17 per cent), especially in entertainment and recreation, and education.
Despite some lumpiness due to the impact of major projects coming through the numbers, the overall profile for non-residential building over the forecast horizon is mostly flat, with activity fluctuating between $30 and $35 billion. Despite a forecast modest improvement, economic conditions will remain subdued and it will take time for capacity constraints to build and underpin a new round of development.
Hence, after further improvement in 2016/17 and 2017/18 we expect to see activity slip back in 2018/19 (-4 per cent). By the end of the decade a healthy upwards growth trend will return as improving economic conditions begin to set in. However this will only take activity to roughly $35.5 billion by 2020/21, a level on par with the 2013/14 result.
Total building outlook: Summary
According to the Building in Australia 2016-2031 report, the total value of all national building commencements is estimated to have grown by 3 per cent in 2015/16. Modest growth in new residential building activity combined with growth in non-residential building generated the result, with multi-residential dwellings in particular leading the way. Alterations and additions provided no support, decreasing.
The value of total building commencements will then fall over the next three years, as increases in non-residential building are outweighed by declines in the residential sector. Total activity will finally improve in 2020/21 as all sectors experience an improvement.
About BIS Shrapnel
BIS Shrapnel is Australia's leading provider of industry research, analysis and forecasting services. BIS Shrapnel helps clients better understand the markets in which they operate, through reliable and detailed market data, analysis of developments and drivers and thoroughly researched forecasts.
BIS Shrapnel compiles accurate, clearly explained and detailed information on industry sectors, markets and industries in which their clients operate. BIS Shrapnel provides market size and segmentation data, market shares, consumer attitudes and supplier reputation information, and regularly conducts both business-to-business and consumer research.
Over the company’s 52-year history, BIS Shrapnel has built up a strong level of expertise and unique methodologies for forecasting.
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