Australian building activity could see the sharpest decline since the Global Financial Crisis according to a new report by BIS Oxford Economics.
The research and forecasting company has predicted that building commencements will fall a cumulative 10 per cent over the next two years, led by a 23 per cent correction in residential starts. Meaning dwelling commencements will fall from 219,900 to 171,350 by 2020.
“The key driver of the residential building downturn is falling investor demand,” says Adrian Hart, associate director of Construction, Maintenance and Mining at BIS Oxford Economics.
“Domestic and foreign investor demand is weakening in the face of tougher lending criteria and increased foreign buyer charges. In turn, falling demand and rising supply (completions) is driving lower house prices, which also affects the attractiveness of housing as an investment asset. While price falls are expected to be modest, the high concentration of investor demand in attached dwellings will see this part of the market fare worst of all over the next two years.”
According to the report, the retreat from investors has opened up opportunities for first home buyers and upgraders/downsizers, but strong growth in land prices is likely to constrain house commencements.
“Land prices have spiked in Sydney and Melbourne in recent years, pricing many people out of the market for new houses,” said Hart. “This will act as a disincentive for new house building and pull buyers towards the established dwelling market.”
High-density dwelling construction will be hit the hardest: it is predicted to halve over the next two years, while construction of medium-density homes will fall 18 per cent and detached dwellings nearly 11 per cent.
In contrast to the residential building market, BIS Oxford Economics’ Building in Australia report forecasts the value of non-residential building commencements to rise a further five per cent over the next two years, following a cumulative increase of 51 per cent over the past three years.
With reasonable economic conditions and a low interest rate environment, total non-residential starts are estimated to have surged 20 per cent in 2017/18 to a record $46.38 billion.
“We are still seeing strong investment cycles play out in the non-residential building market,” says Hart. “The resources boom drew industry and employment to the mining regions. The pendulum has swung back the other way over the past few years, with weakness in the resource sector, a lower dollar and improving service sector conditions supporting new commercial and industrial developments, particularly in New South Wales and Victoria.”
According to Hart, while governments are now more alert to the challenges than in the past, more could be done to coordinate investment in built assets and to avoid boom-bust cycles.
“Rising non-residential building activity will help offset the fall in residential work,” said Hart. “While much of the sharp increase in non-residential building commencements in recent years has been driven by the private sector, government-sponsored projects across health, education, prisons, defence and entertainment are now coming to the fore.
“In this environment, it is important that we don’t repeat the mistakes of the past – in particular, pushing a large cycle of publicly-funded works in already-heated local markets which strain capacity, capability and ultimately value for money. Rather, governments should look for ways to smooth the cycle while also satisfying long term growth and service provision objectives.”