BIS Oxford: Australia's home building boom is about to go over a cliff

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Australia’s booming residential construction market is shifting into reverse, with a 31% slump forecast over the next three years.

The fall in the number of high density apartments underway nationally will be closer to 50%, according to market analyst and economic forecaster, BIS Oxford Economics.

These forecasts fit with the latest building approval numbers which are trending lower, led by a sharp decline for apartments.

National building starts peaked in 2015-16 at $107.3 billion, up 22% in real terms since the end of the resources investment boom in 2012-13.

While a similar value of commencements is estimated for 2016-17, the report by BIS Oxford Economics forecasts a cumulative 17% fall in the real value over the three years to 2019-20.

“Overall the slump will be similar in percentage terms to the residential downturns in the mid-1990s and the introduction of the GST in 2000-01,” says Adrian Hart, Associate Director of Construction, Maintenance and Mining at BIS Oxford Economics.

“The record breaking residential building boom is already turning, offsetting growth in starts for non-residential building through 2016-17.

“Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, as supply catches up to underlying demand.”

Here’s how BIS Oxford sees the residential building market:

The BIS outlook for residential building activity is more bearish than estimates in the May federal budget as well as last week’s Reserve Bank’s (RBA) statement.

RBA governor Philip Lowe then said: “Current high level of residential construction is forecast to be maintained for some time, before gradually easing.”

Robert Mellor, managing director at BIS Oxford Economics, says it may not be as rosy as all that.

“Our dwelling demand/supply analysis indicates that all states with the exception of Victoria and New South Wales are either in balance or oversupply,” says Hart.

“With dwelling completions running ahead of underlying demand over the next two years, Australia will swing to a significant national residential stock surplus by 2018-19 despite New South Wales still facing a significant stock deficiency.

“While high density dwellings do take longer to complete than traditional detached dwellings, when the end comes it will be very swift.”

He says the high proportion of investor activity is another risk factor as investor sentiment can turn quickly.

Overall, BIS Oxford expects this financial year will be the peak in high density residential completions, but that part of the market will slump around 50% in the subsequent two years.

A milder decline is forecast for detached houses.

BIS Oxford says the coming downturn in building commencements is a fundamental challenge to achieving the 3% GDP target in the federal budget.

In contrast to the residential building market, BIS’ Building in Australia report forecasts the value of non-residential building commencements to rise further in 2017-18, following a cumulative increase of 25% over the past two years.

Improved economic conditions along the eastern seaboard are driving new commercial and industrial developments, particularly in New South Wales and Victoria, says BIS Oxford.

“Offices, retail and accommodation commencements have been very strong, although the latter two segments will run out of puff in coming years given the project pipeline and fundamental demand drivers,” says BIS Oxford.

“By contrast, education and health segments are poised for further growth in commencements given a range of large tertiary education and hospital projects about to get underway.”

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