Australia’s housing sector has played a crucial role in the economic transition after the mining boom.
Dwelling starts have hit all-time highs, thousand of construction jobs have been created, and even more Australians have been employed fitting out the new apartments and houses. Of course there has also been a surge in professional services workers such as architects as a result of the big increase in building.
But that is all about to come to a screaming halt according to Alex Joiner and Alexandra Veroude, both Australia economists at Bank of America Merrill Lynch. This morning they’ve released a research paper highlighting 10 key themes for Australia in 2016.
It is an excellent walk through the many questions people are asking at the moment given the ructions in global markets and fears about the global economic outlook.
But while Joiner and Veroude expect an uptick in Australian growth this year to 2.7% against the 2.3% they have pencilled in for 2015 their outlook also has a pretty bearish view on construction, house prices and as a result employment in hosing and related sectors.
In a theme they are calling “the coming residential bust” Joiner and Veroude write that “the residential construction cycle has peaked at unprecedented levels, the question now becomes how quickly it declines.”
They say 2016 is likely to be the year of “peak housing” and add that “by the end of the year, the cycle will likely be receding and detracting from growth and employment.”
One the growth front joiner and Veroude say that even though there has been an unprecedented boom in construction its peak contribution to growth has been less than half the contribution of past cycle. That they say means the bust won’t hurt as much when it comes.
At least in a growth sense.
But employment is a different matter (our emphasis):
With dwelling starts at record highs, direct residential building construction employment is around 100,000. However, services to fit out residential property accounts for 700,000 people. There has also been a material rise in professional services linked to this cycle, including architects and real estate services. The risk to employment will be determined by how quickly will the dwelling construction cycle declines. And despite good employment growth there will be skill mis-matches in reabsorbing all of these potential job losses. This is as construction and blue collar workers are not easily absorbed into the sectors of employment that are growing – primarily services.
Rising unemployment is never a good thing for an economy and along with continued job losses in mining construction and the closure of car manufacturing Joiner and Veroude expect unemployment to head back to 6% and stay sticky “at or above” this level.
On property prices themselves the authors say “(dwelling)price growth will decelerate markedly with the risk that prices will decline outright.”