Australian Building Market Set for Three-Year Decline: Report

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According to economic forecaster, BIS Oxford Economics, Australia’s building market will shift into reverse over the next three years led by a collapse in residential starts.

In its recent ‘Building in Australia 2017-2032’ report, BIS indicated the value of national building commencements peaked in 2015/16 at A$107.3 billion (in constant 2014/15 prices), up 22% in real terms since the end of the resources investment boom in 2012/13. While a similar value of commencements is estimated for 2016/17, the report forecasted a cumulative 17% decline in the real value of commencements over the three years to 2019/20.

“The record breaking residential building boom is already turning, offsetting growth in starts for non-residential building through 2016/17,” said Adrian Hart, Associate Director of Construction, Maintenance and Mining at BIS Oxford Economics. “Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, as catches up to underlying demand.

“BIS expects the total residential market to fall by around 31% over the next three years, but the decline in the number of private high density apartments getting underway nationally will be closer to 50%.”

The BIS outlook for residential building activity is more bearish than the 2017/18 Commonwealth Budget, as well as the recent Reserve Bank’s statement accompanying its decision to keep interest rates on hold. In the statement, Reserve Bank Governor, Philip Lowe, said that the “current high level of residential construction is forecast to be maintained for some time, before gradually easing.”

It may not be as rosy as all that.

“Our dwelling demand/supply analysis indicates that all states with the exception of Victoria and NSW are either in balance or oversupply,” continued Hart. “With dwelling completions running ahead of underlying demand over the next two years, Australia will swing to a significant national residential stock surplus by 2018/19 despite NSW still facing a significant stock deficiency.”

“While high density dwellings do take longer to complete than traditional detached dwellings, when the end comes it will be very swift,” added Robert Mellor, Managing Director at BIS Oxford Economics. “The high proportion of investor activity is another risk factor as investor sentiment can turn quickly. Overall, we expect 2017/18 will be the peak in high density residential completions, but that part of the market will slump around 50% in the subsequent two years. By contrast, a milder decline is forecast for detached houses.”

Encouragingly, the report forecasts the value of non-residential building commencements to rise further in 2017/18 – following a cumulative increase of 25% over the past two years.

“Improved economic conditions along the eastern seaboard are driving new commercial and industrial developments, particularly in NSW and Victoria,” said Hart. “Offices, retail and accommodation commencements have been very strong, although the latter two segments will run out of puff in coming years given the project pipeline and fundamental demand drivers. By contrast, education and health segments are poised for further growth in commencements given a range of large tertiary education and hospital projects about to get underway.”

However, the total value of non-residential building commencements is expected to ease later this decade, joining the downturn in residential starts.

“Except for a few sub-segments, the current upswing in non-residential building commencements is unlikely to be sustained over the next few years,” said Hart. “Weaker prospects for growth in retail sales will see a narrower pipeline for retail projects, while a tripling in accommodation starts since 2012/13 may also push activity in this segment over the top, resulting in a correction. With the exception of offices, transport building (eg. railway stations and airport terminals), health and education, most other non-residential building segments are expected to experience flat or declining commencements activity over the remainder of the decade.”

The looming downturn in building commencements presents a fundamental challenge to achieving the 3% growth targets for the Australian economy outlined in the 2017/18 Federal Budget.

“The strong growth in building commencements since 2012/13 provided a welcome boost for the Australian economy at a time when resources-related investment and construction activity fell heavily,” concluded Hart. “But with residential building activity in particular now set for a sharp decline – along with its multiplier impacts on industries such as construction, manufacturing and retail – the Australian economy will need new investment drivers to support growth and employment.”