BIS Shrapnel is forecasting a sharp increase of 21 per cent in housing starts, to 160,000, in 2009/10. BIS Shrapnel says this will be the beginning of a four-year upturn for the housing sector.
According to BIS Shrapnel’s Building in Australia, 2009 – 2024 report, the strength of the upturn in construction will be dependent on the continuation of very low interest rates.
Jason Anderson, Senior Economist, BIS Shrapnel, said the they are forecasting interest rates will be kept low until the expansion in housing construction is great enough to offset a deep plunge in business investment, which is only just beginning to become evident.
It has also been speculated that the phasing down of first-home buyer grants over the remainder of 2009 will mark the end of the housing recovery. Anderson said that BIS Shrapnel certainly expect first-home buyer numbers will subside from a record number of 200,000 during calendar year 2009, and forecast a drop of 30 per cent to 140,000 first-home buyers, in calendar year 2010.
Demand from first-home buyers will be waning at the same time as business investment falls sharply. Business investment includes commercial building and engineering projects as well as equipment spending, and it currently accounts for 20 per cent of GDP.
“The decrease in business investment is expected to wipe $32 billion, or 2.8 per cent, from GDP during 2009/10,” says Anderson. “To put this decrease in context, it is equivalent to the annual value of national new housing construction.”
BIS Shrapnel says the decrease in commercial building activity will be particularly sharp. The national value of commercial and industrial building commencements is expected to show a cumulative decline of 55 per cent during 2008/09 and 2009/10.
To compensate for the plunge in business investment the nation will depend on a strong and sustained recovery in residential building activity throughout 2009/10 and 2010/11. To stimulate housing demand from upgraders and investors low interest rates will need to persist for an extended period. If this is the case, BIS Shrapnel forecasts a further nine per cent rise in building starts, to 174,500, in 2010/11.
Anderson said that standard variable housing rates are expected to remain below six per cent throughout 2010, and with interest rates remaining low, demand for housing from upgraders and investors is expected to increase enough during the first half of 2010 to compensate for the drop-off in first-home buyers. A by-product of this, however, is that median house prices will continue to show moderate increases of about five per cent in most cities during calendar year 2010, which is consistent with long-run growth in prices.
BIS Shrapnel says the housing construction upturn will have a wide range of effects across the states. New South Wales is best placed to benefit from low interest rates, given the undersupply of housing is far greater in that state.
In other states, the housing upturn will be considerable, but offset by a sharp decline in commercial building. The New South Wales building sector is likely to gradually emerge as a relatively attractive location for construction workers for the first time since the Sydney Olympics boom of 2000.