Housing construction remains suppressed by high interest rates

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Underlying demand for new dwellings at record high

According to BIS Shrapnel , an industry analyst and economic forecaster, the total Australian building commencements are forecast to edge up by just 1% in 2008/09, as high interest rates keep dwelling construction well below underlying demand.

BIS Shrapnel’s recent building activity forecast report, Building in Australia, 2008 to 2023, anticipates a 3% increase in new dwelling construction in 2008/09, offset by a marginal 2% decline in non-dwelling building commencements.

In 2007/08, the value of new dwelling construction remained below the last peak in 2003/04. Housing construction has been weighed down by the strength of business investment.

The national value of new housing construction in 2007/08 was exceeded by the value of private sector investment in engineering construction projects. This outcome represents a pronounced changing in gears for the Australian economy.

The strength of engineering construction activity, led by the mining sector, has increased national economic growth and created shortages of skilled labour across many sectors.

In response, companies have increasingly drawn on overseas workers to fill job vacancies. As a result, net overseas migration jumped to an estimated 195,000 persons in 2007/08, and is forecast to reach a new record level of 230,000 persons in 2008/09.

This population increase is creating demand for housing. National underlying demand for new dwellings was estimated to be 158,000 per annum over the five years to 2005/06.

Underlying demand is forecast to average 185,000 new dwellings per annum over the 2008/09 to 2012/13 period.

National starts are currently well below this level at an estimated 156,800 dwellings in 2007/08. The fact that dwelling construction remains neutral has begun to affect the rest of the economy.

Australia cannot cope with much more expansion in business investment, because the nation is running out of housing to accommodate the additional workers required to undertake this investment.

Housing shortages are leading to strong growth in rentals, which are now a major driver of inflation. According to the CPI index measure, national average rental growth was just 3% in 2005/06, but the rate of growth accelerated to 8% in 2007/08. Growth in national average rentals is expected to rise to 10% over the course of 2008/09.

Strong growth in rentals combined with steady housing interest rates is expected to support the value of new dwelling commencements in 2008/09.

A reduction in housing interest rates is expected to be a trigger for the much needed strong upturn in housing in 2009/10.

While residential building has been suppressed by rising interest rates, the level of non-residential building has increased strongly, rising by 54% from 2001/02 to 2007/08.

Growth has been led by a boom in office building over the past three years. Demand for office space has been a corollary to the strength of mining activity, with Queensland and Western Australia enjoying booms in office building.

However, growth in employment and retail sales are forecast to slow in 2008/09, under the weight of higher interest rates.

In this environment, commercial building commencements are forecast to weaken, leading to falls in non-residential building commencements in 2008/09 (-2%) and 2009/10 (-6%).

The downturn in commercial building will be an important factor in the overall building cycle in a number of cities. Due to shortages of skilled labour, it would be difficult for the industry to cope with a rise in apartment construction, unless there is a substantial decline in office building.

This change in sectoral drivers is expected to develop from 2009/10, and means that national total building commencements are likely to show only reserved growth over the next five years.

Outlook for building activity by state

New South Wales

Building activity in New South Wales has been close to flat for almost a decade, and is due for an upturn. Building commencements are forecast to rise by 10% in 2008/09, followed by an 8% increase in 2009/10.

Expansion should be led by residential building, which has been running at low levels for the past three years. Population growth has recovered, and housing supply is well below underlying demand, so the tight rental market will persist for the remainder of this decade.

Victoria

Building activity in Victoria has enjoyed a sustained upturn, rising by 25% over the three years to 2007/08. Activity has been stimulated by Melbourne’s solid population growth.

Total building commencements are forecast to decrease by 5% in 2008/09, led by the beginning of a sharp downturn in commercial building commencements.

Residential building is forecast to continue to expand; however, as the undersupply of housing remains widespread.

Queensland

Building activity in Queensland has been very strong, rising by 36% over the five years to 2007/08. Housing starts and renovations recovered in 2006/07 and 2007/08, as the residential property market performed strongly in 2007.

Demand for new dwellings is expected to slow in 2008/09, but the value of non-residential building commencements is expected to rebound due to a number of office and retail projects. Overall building activity will remain solid, so the outlook for industry employment remains bright.

South Australia

In South Australia, building commencements showed strong growth in 2007/08 (+14%). Activity is being supported by strong population growth, primarily from net overseas migration. Total building is expected to rise by a further 6% in 2008/09.

Western Australia

Western Australia has enjoyed seven consecutive years of expansion, which has seen a doubling in building activity, culminating in a 9% rise in 2007/08.

However, housing starts are in decline, falling by an estimated 11% in 2007/08 and expected to drop a further 3% in 2008/09, due to poor housing affordability. While the level of non-residential building commencements has been extremely strong, this sector is forecast to decline by 15% in 2008/09.

Rising building costs are eroding the profitability of commercial building for some developers, which are expected to dampen the pipeline of new retail and warehouse buildings.

Tasmania

Building activity grew by an estimated 11% in Tasmania in 2007/08. The growth in 2007/08 was led by non-residential building commencements.

Total building commencements are forecast to recede by 10% in 2007/08, although this would still be a high level of activity by historical standards.

Northern Territory

In the Northern Territory, building commencements increased by 5% in 2007/08. The growth in 2007/08 was led by a 33% surge in non-residential building commencements, which offset a downturn in residential building (-13%).

Total building commencements are expected to be volatile in 2008/09 and 2009/10, due to the incidence of major projects.

Australian Capital Territory

Building commencements in the Australian Capital Territory declined by 12% in 2007/08, with a similar rate of decrease for residential and non-residential building.

A recovery is forecast for 2008/09 (+11%), before a further decline in 2009/10 (-14%). The fluctuation in total building commencements is due to the incidence of office projects.

5/08/2008 12:00 AM

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