Massive home building boom set to move into oversupply

Massive home building boom set to move into oversupply

Posted on Monday, July 20 2015 at 10:56 AM

According to economic forecaster BIS Shrapnel, the record-beating residential building boom has already reached its peak and will soon begin to run out of steam.

company’s Building in Australia 2015-2030
report says that national dwelling commencements are estimated to have reached
their peak over 2014/15 and will begin to gradually decline from this level in
coming years.

recording strong growth over the past few years, we estimate that total dwelling
starts reached just over 210,000 in 2014/15, an all-time record high,” associate
director Dr Kim Hawtrey says. “From this level, national activity is then
forecast to begin trending down over the following three years, with the
currently high-flying apartments sector leading the way down.”

a sizeable dwelling stock deficiency coupled with record-low interest rates drove
building activity to its current highs, Hawtrey warns that the national market will
shift into a mild oversupply by 2018.

interest rates have unlocked significant pent-up demand and underpinned the current
boom in activity,” he says, “but as population growth slows while construction
activity remains strong, new supply will begin to outpace demand.

will see the national deficiency of dwellings gradually eroded and some key
markets will begin to display signs of oversupply.”

the company’s latest forecasts, net overseas migration is expected to continue
its recent downwards trend and gradually ease in response to softer employment
and economic growth, resulting in a weaker outlook for population growth.
However, residential building activity has continued to grow and new dwelling
completions are estimated to have pushed above the underlying demand for
dwellings in 2014/15 for the first time since 2011.

on BIS Shrapnel assumptions about household formation per thousand head of
population, the Building in Australia
report estimates the national dwelling stock deficiency reached a
peak of around 108,000 dwellings by June 2014.

a strong 2014/15 this has slipped back to approximately 85,000 as at June 2015.

a sustained period of underbuilding, new dwelling supply is now exceeding demand,”
Hawtrey explains. “With investors and upgrader/downsizers providing enough
momentum to sustain activity at historically strong levels, we estimate that
the national deficiency will have been largely satisfied by 2018, although the
outlook will vary significantly between markets.”

the research shows that despite reaching its peak in 2014/15, new dwelling
starts will continue to track at historically high levels over the coming
years. Low interest rates will continue to support demand, with investors and upgrader/downsizers
expected to remain the driving force across the national market.

we are forecasting a fall in activity from its current peak, this will mostly
be felt in the higher density segment of the market,” Hawtrey says. “After
climbing to nearly 100,000 starts, there will be an inevitable adjustment in
the other dwellings sector as they move back to more sustainable levels.
Detached houses – the late bloomer in this cycle – will prove more resilient,
holding up in 2015/16 before beginning a more subdued decline beyond that.”

Residential building

to the report, housing starts are estimated to have grown by 16 per cent in
2014/15 to reach a record high of 210,000. The stellar result was underpinned
by 24 per cent growth in the other dwellings sector, which is estimated to have
peaked at 95,500, while detached houses delivered a solid
result of 114,600 new starts.

this level, BIS Shrapnel expects to see activity begin to fall in 2015/16 (-5
per cent) as pressure is gradually alleviated in some markets. The decline will
be led by the other dwellings sector as it falls back from its unsustainable
high, while detached house starts will remain flat. Affordability concerns will
begin to emerge in the key Sydney and Melbourne markets, which will limit
demand despite interest rates remaining at record-low levels.

South Wales, Victoria and Queensland led the way in 2014/15, but only New South
Wales is expected to maintain growth into 2015/16 off the back of a strengthening
economy and a persistent deficiency of dwellings. Queensland will remain relatively
flat around a strong level as its market moves towards balance, while Victoria
will experience the most significant reversal of the three eastern states (-7
per cent). Off such a sustained period of strength, Victoria has been
over-building relative to demand and is estimated to see areas of the Melbourne
market move into oversupply.

Australia will experience the sharpest decline of the five major states (-13 per
cent) as its economy slows in the wake of the mining boom and population growth
softens sharply. This will see a significant stock deficiency quickly
evaporate, and with vastly reduced pressure in housing demand in the key Perth
market, subsequently building activity will soften considerably.

Over the medium term, activity will slow
steadily to 163,800 new starts in 2017/18, with modest increases in interest
rates in late-2016 combining with softening pressure in key markets to limit
new development. From this level a new, more modest upturn will begin as rates
are cut once more and population growth begins to pick up.


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