Analysts believe Australian residential construction is heading for its biggest fall since the GFC

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  • BIS Oxford Economics says a national fall in dwelling commencements is “just the beginning” of a 23% correction
  • The fall will be led a steep drop in apartment construction.
  • And the sharpest dip will be in the eastern states.

A correction in the Australian building industry is coming, led by a steep drop in apartment construction in the eastern states where home price growth has been strongest.

According to forecasts by industry analysts BIS Oxford, falling investor demand and high land prices will contribute to the sharpest contraction in residential building since the 2008 GFC.

Residential starts are forecast to fall 23% over the next two years, contributing to an overall fall in building construction of 10% across Australia.

“The building sector is switching from being a strong growth driver to a drag on the economy,” says Adrian Hart, Associate Director of Construction, Maintenance and Mining at BIS Oxford Economics.

In its Building in Australia 2018-2033 report, BIS Oxford Economics indicates the real value of national building commencements rose an estimated 5% in 2017-18 to $118.5 billion, up 35% in real terms since the last trough in 2011-12.

Commencements next financial year, despite a dip, will still be higher than any year before 2015-16.

However, BIS Oxford Economics says the risks — including high land costs, slowing migration, and falling investor demand — could spark a deeper correction.

“As the apartment boom turns to bust, those states and territories which saw the greatest increases in recent years are forecast to see the greatest corrections in total dwelling starts,” says Hart.

New South Wales apartment construction is forecast to drop 26% over the next two year, Victoria 29%, Queensland 15%, and 27% in the ACT.

“Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, which is set to fall 50%,” says Hart.

“The very mild drop in residential commencements in 2017-18 is just the beginning.

“The key driver of the residential building downturn is falling investor demand. 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,” he says.

“This will act as a disincentive for new house building and pull buyers towards the established dwelling market.”

Despite the severity of the decline in the eastern states, national dwelling starts will remain at levels greater than any year before 2014 driven by sustained population growth and improving economic conditions.

“While there are local pockets of oversupply, only Western Australia and Queensland are experiencing a significant net oversupply of dwelling stock at a state level,” says Hart.

“With stock deficiency to start rising nationally again from 2019-20, we anticipate a renewed upswing in residential building starts through the early to mid-2020s.

“But we could experience a deeper downturn before then, and a delayed recovery, if fundamental drivers of residential activity, such as net overseas migration or investor demand, were to ease more than expected.”

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