Interesting Times Ahead in NSW Construction

residential building

With changes afoot to home owner incentive schemes, the next few months will produce interesting times for the residential construction sector in New South Wales.

And in commercial property, twelve month expectations for capital growth, rents and construction activity remain reasonably solid.

Meanwhile, both engineering construction activity and construction sector employment are running hot, albeit with expectations of slower growth going forward.

Below is an outline of current market conditions with regard to overall construction activity, residential construction, commercial property and non-residential construction, engineering construction and employment within the property and construction sector throughout New South Wales.

Construction Work Done NSW

Overall activity

Overall levels of construction activity throughout New South Wales remain subdued.

At $9.198 billion, the seasonally adjusted value of all building and engineering work done throughout the March quarter in 2012 was down by 3.5% on the December quarter and was 3.1% lower when compared to the March quarter last year (see chart).

Moreover, whilst the forward pipeline of engineering construction work is reasonably strong (see below), that of building work is not. At $14.558 billion, the value of building work in the pipeline as at March 31 2012 was well down when compared with that recorded at the same time in 2011 (15.206 billion) and 2011 ($16.511 billion).

Still, moderate levels of growth are expected going forward. In 2012/13, the Construction Forecasting Council (CFC) expects the overall value of construction work done throughout the state to increase from an estimated $42.213 billion in 2011/12 to $45,675 billion before reaching $49,838 billion in 2013/14.

Residential construction

With the seasonally adjusted number of dwelling unit commencements recorded in the March quarter plummeting to 5,158 – the lowest level on record since statistics commenced in 1984 (refer chart) – current market conditions in residential construction are awful.

Going forward, however, a surge in dwelling approval numbers in May (3,059, seasonally adjusted – the second highest number for the past twelve months) was the sector’s first positive sign in a long time.

Furthermore, in its most recent forecast, Housing Industry Association (HIA) says it expects housing start numbers to rise back above 8,000 by the end of the year (see chart).

But the next few months will be lumpy. Indeed, May’s approval numbers are largely seen as a pull-forward effect as homebuyers and investors rushed to take advantage of full stamp duty concessions (worth over $20k in some cases) for new homes under $600,000 before those concessions expired in June. These concessions have been replaced by a less generous grant of $5,000 to non-first home buyers for newly-built properties of up to $650,000.

Further complicating matters, starting in October, the first home owners grant will increase from $7,000 to $15,000 for the purchase of new homes, and the government also announced in its recent budget that is wants to build 76,000 new dwelling units – more than half in Sydney’s South West.

The bottom line of all this is that the next few months will be quiet as investors and existing home owners pull back whilst new home buyers hold off purchases until October. After October, however, demand from new homebuyers will come back strongly, and this will be supported by strong levels of public sector housing investment as the state gets started on its 76,000 new dwelling target.

Housing Starts NSW

Commercial Property/Non-residential construction

Overall, the commercial property market in New South Wales appears to be stable.

In the June Quarter Property Council of Australia Property Confidence survey, survey participants indicated moderate levels of confidence overall (see below). Participants in that survey expressed pessimistic sentiment with regard to twelve month price expectations for the retail and accommodation sectors but bullish expectations for the retirement living sector and forward work schedules as well as expectations of moderate price rises for offices and industrial facilities.

Office market conditions look reasonably promising. Whilst vacancy rates (now 9.6%) remain high, CBRE Australia says these have now peaked and are expected to fall back toward 8% over the next three years, resulting in a moderate increase in prime effective rents.

In terms of construction activity, whilst positive expectations on the part of Property Council survey participants regarding forward work schedules are encouraging, the pace at which new work is coming in remains slow, meaning that activity is likely to be subdued in coming months as public sector stimulus programs continue to wind down. At $3.111 billion, the seasonally adjusted value of non-residential building work approved for construction in the six months to May was well below that in the previous corresponding period to May 2011 (3.790 billion) and also that for the six months to May 2010 ($3.917 billion).

Property Index Confidence Index

Engineering Construction Activity

Current levels of engineering construction activity in New South Wales remain strong, with the $5.537 billion (seasonally adjusted) worth of work done in the state throughout the March quarter representing the highest level of activity on record (see chart).

Furthermore, at a value of $8.611 billion, the forward order book of upcoming projects is reasonably solid.

Going forward, therefore, following on from blistering growth of 22.7% in 2011/12 (est.), the CFC expects the value of work done in this sector to grow by a respectable 6.0% in 2012/13.

Beyond that, however, the forecaster expects growth to stall as fiscal considerations force a public sector wind back in infrastructure investment.

Engineering Construction Activity NSW

Employment

For now, the New South Wales construction labour market is running hot. At 260,800, the number of people employed full time in construction throughout the state in the three months to May this year was the highest number on record since the winter months of 2008 (see chart).

Going forward, however, there are signs that the market may be cooling. The latest HIA Trade Availability report (March quarter) suggested a moderate undersupply of residential construction tradespeople in regional New South Wales but a significant oversupply in Sydney – a sign that in the Sydney residential market at least, demand for construction labour may be easing.

Furthermore, in the latest Property Council survey, participants did say they expected staffing levels to increase over the next twelve months, but only to a very modest extent and by slightly less than average expected construction jobs growth country-wide.

Construction Industry Employment NSW

 By Andrew Heaton
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