Despite a chronic shortage of housing supply, conditions continue to deteriorate in the Australian residential construction sector.
The sector remained reasonably strong in 2010 as high activity levels resulting from low interest rates and boost to the first home owners grant in 2009 spilled over into last year. Overall, the value of work done increased by 10.63% in the year to come in at $48.425 billion, according to the Australian Bureau of Statistics (ABS). At this level, homebuilding was at an all time high.
Now that the spillover effect has subsided, however, things have turned ugly. According to the April edition of the Performance of Construction Index from Australian Industry Group (AIG), construction activity on new homes fell again in March for the eleventh straight month. That relating to apartment building declined for the twelfth month on end.
That’s not all. In quarterly Master Builders Australia (MBA) surveys, a majority of builders have rated residential market conditions as negative since last September. Results of the most recent survey indicate that conditions deteriorated further in the March quarter.
Then, there is the worrying approval data. On a seasonally adjusted basis, the number of dwelling units approved declined in three of the first four months this year, according to data from the Australian Bureau of Statistics (ABS). In that time, the total number of units approved (52,516) (seasonally adjusted) was well down on that for the last four months of 2010 (56,289).
Moreover, the overall value of approvals in the year to April ($39,136) is nowhere near the value of work done over the past year. That means that there is less in the way of new work entering the system than there is work being done and leaving the system.
Granted, recent ABS data does show the value of work in the pipeline as at March 31 ($28.291 billion) being well up from a year earlier ($26.569 billion).
Still, on the weight of evidence above, it does seem as though current conditions are very challenging.
Not surprisingly then, forecasters are not optimistic about the near-term future. The Housing Industry Association (HIA), for example, expects the overall number of housing starts to fall by 15% this year to around 143,430 (see chart). Whilst not quite as pessimistic as HIA, the Construction Forecasting Council (CFC) sees only modest growth in activity. This year, the CFC believes, the value of work done in the residential sector will amount to $50.007 billion – up just 3.27% on last year.
Longer term, analysts are more optimistic.
“We’re not expecting a boom,” BIS Chief Economist Frank Gelber wrote in The Australian on June 02, “But we do expect solid rises in prices and building activity.”
BIS is not alone. In its latest Australian Housing and Household Sector report, ANZ predicts that the number of dwelling completions will rise to around 180,000 by 2015. Despite its pessimism about 2011, HIA sees housing starts bouncing back to almost 159,000 in 2013. And by financial year 2013/14, the CFC expects the value of work done in the residential sector to reach almost $60 billion.
There is no shortage of demand: ANZ believes the nation currently has a housing shortage of around 240,000 homes (up from around 20,000 in 2005) and that the housing market imbalance will reach more than 400,000 by 2015.
Instead, challenges lie on the supply side. HIA, for example, believes that planning and development bottlenecks are inhibiting new residential development. So too, the association says, is the cost of stamp duty on new homes.
State by State
New South Wales/ACT
Conditions in New South Wales/ACT, where the housing shortage is at its worst, are not bad at the moment.
In 2010, the value of residential construction work done in the state and territory combined increased by 16.75% to $11.947 billion.
Whilst this represents a respectable year on year increase, activity levels are still down when compared with annual levels around the $12 billion mark seen early in the last decade.
Going forward, soft approval data points to a weak near-term outlook. In the twelve months to April, the value of dwellings approved in the state and territory came in at $9.578 million – not enough to sustain current levels of activity.
Not surprisingly then, HIA expects the number of housing starts to fall from this year from 37,520 to 35,250.
In dollar terms, the CFC expects the value of work done in the residential construction sector this year to increase by a modest 4.38% to $12.470 billion.
The longer term, however, looks brighter. By 2013, HIA reckons the number of housing starts will have risen above 41,370. By financial year 2012/13, the CFC expects the dollar value of activity to have reached $15.758 billion.
Victoria
After a surge in activity last year, more subdued conditions lie ahead for residential construction in Victoria.
In 2010, the number of housing starts jumped from 45,910 to 59,500 – far higher than at any time over the last decade. The overall value of work done rose by 18.81% to come in at $15.147 billion.
Going forward, however, HIA expects new dwelling starts to fall back to 48,170 this year and to remain under 50,000 until at least 2013. Whilst the CFC does expect activity to remain strong throughout 2011, increasing to $16.375 billion on the back of last year’s surge in starts, the forecaster expects a slight contraction in activity over the following two years. By financial year 2012/13, the council believes, the value of work will ease back to $15.321 billion.
Soft approval data supports this. On a seasonally adjusted basis, the number of new dwellings approved in the first four months of the year amounted to 19,867 – down from 21,030 in the last four months of 2010. Moreover, with approvals in the last twelve months amounting to $14.304 billion, the value of new work coming in is not sufficient to support sustained activity at current levels going forward.
Queensland
Even before last summer’s disasters, conditions in Queensland were awful.
At 28,270 and 30,080 respectively, the number of dwelling starts in the state during 2009 and 2010 was far lower than at any time shown in HIA data going back as far as 2003 (the next lowest was 38,800 recorded in 2006).
Not surprisingly then, at $9.855 billion, the value of work done in residential construction last year (virtually unchanged from $9.800 in 2009) remained at five year lows.
Things will not improve anytime soon. HIA expects housing starts to bottom out this year at just 24,640 before rising back up to a still modest 32,100 by 2013. In terms of dollar values of activity, the CFC expects another soft year in 2011 ($10.396 billion) followed by a return to modest growth thereon after as activity rises to $13.171 billion by financial year 2012/13.
South Australia
With the number of housing starts increasing from 11,080 to 11,990 last year, it would appear at first glance as though conditions in the state were reasonably strong.
However, that is not the case. The overall value of work done ($2.855 billion) grew by just 3.16% in the year. This year, the CFC expects activity to fall more than twelve per cent to $2.504 billion.
This downbeat assessment is supported by soft approval data. On a seasonally adjusted basis, the number of dwelling units approved in the six months to April (5,127 billion) was well down on the 6,136 for the preceding half year. Moreover, approvals in the year to April amounting to just $2.273 billion, the value new work coming in is nowhere near sufficient to support sustained activity at current levels.
Longer term, the sector is set for moderate growth at best. HIA forecast the number of starts to drop back to 11,030 this year and to remain flat over the two years thereon after. Though the CFC expects the sector to return to growth in financial year 2012/13, the forecaster does not expect the value of work to break the $3 billion barrier until 2014/15.
Western Australia
Like South Australia, Western Australia experienced a surge in construction starts last year from 20,220 to 24,560 – the highest level recorded since 2006.
Also, like SA, however, this is not translating into strong levels of activity. At $7.127 billion, the value of work done in the state grew by just 3.49% last year, and the CFC expects virtually no growth in activity this year ($7.155 billion).
Conditions look set to remain subdued throughout the medium term. This year, the number of starts is set to drop back to 20,370, HIA says. The CFC expects subdued activity levels to persist until at least financial year 2012/13, when the forecaster expects activity of $7.511 billion. Beyond that, however, the forecaster is more optimistic, tipping that the value of work done will reach almost $10 billion ($9.984 billion) by 2014/15.
Tasmania
With the number of housing starts having increased every year for the past six years, Tasmania is experiencing strong conditions.
Last year, the value of work done increased by 13.8% to $827.9 million.
The outlook, however, is not encouraging. Approvals in the year to April came in at $615.3 million – nowhere near sufficient to sustain activity at current levels.
Furthermore, HIA expects the number of housing starts (3,070 in 2010) to ease back to 2,850 this year, and to remain flat over the course of the following two years.
Not surprisingly then, the CFC expects the value of work to drop back to $685.9 million this year and to grow only moderately thereon after, with activity not reaching last year’s levels again until financial year 2013/14.
Northern Territory
With the value of work done increasing by 8.94% to $486.3 million last year, the Northern Territory experienced strong conditions last year.
As with other states, however, the near term outlook is not encouraging. At $257.5 million, the value of approvals over the past twelve months is not sufficient to sustain current activity levels. The number of starts, too, is expected to drop back from 1,270 to 1,110, according to HIA.
As a result, the CFC expects activity to drop back to $424.3 million in 2011. Moderate levels of growth should return thereon after, the forecaster says, with the value of work breaking the $600 million barrier ($608.3 million) by 2013/14.
