Leading building market analyst and economic forecaster BIS Oxford Economics released its Building in Australia 2017-2032 report today, showing that national building commencements peaked in 2015/16 at $107.3 billion and are set to hit a downward plunge.
BIS Associate Director of Construction, Maintenance and Mining Adrian Hart expects the peak to be followed by a sharp decline in the next few years, particularly in the case of high-density apartments.
“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,” said Mr Hart.
“BIS expects the total residential market to fall by around 31% over the next three years, but the decline in the number of private high-density apartments getting underway nationally will be closer to 50%.”
BIS says this slump will be similar to the residential downturns in the mid-90s and the introduction of GST in the early-2000s.
Source: BIS Oxford Economics
BIS less optimistic about residential construction than the RBA
BIS have described its outlook for residential building activity as “more bearish” than the one presented in the 2017 Federal Budget or by the Reserve Bank of Australia(RBA).
At last week’s RBA board meeting, Governor Philip Lowe said the “current high level of residential construction is forecast to be maintained for some time, before gradually easing”.
But BIS Managing Director Robert Mellor 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,” said Mr Mellor.
“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.”
Mellor says that while high-density dwellings take longer to complete than traditional detached dwellings, when the boom ends it will be “very swift”.
He also says that the high proportion of investors on the market could be a contributing risk factor because investor sentiment can “turn quickly”.
“With residential building activity in particular now set for a sharp decline – along with its multiplier impacts on industries such as construction, manufacturing and retail – the Australian economy will need new investment drivers to support growth and employment,” said Mr Hart.
Commercial and industrial building to rise
On the back of a 25% increase in the past two years, BIS forecasts the value of non-residential building commencements will rise further, in stark contrast to the outlook for residential building.
“Improved economic conditions along the eastern seaboard are driving new commercial and industrial developments, particularly in New South Wales and Victoria,” said Mr Hart.
“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.”
BIS says the health and education sectors are ripe for future growth in commencements, considering a range of big tertiary education and hospital projects are about to begin.
However, the total value of non-residential building commencements is forecast to ease later this decade, joining the downturn in residential starts.
“Except for a few sub-segments, the current upswing in non-residential building commencements is unlikely to be sustained over the next few years,” said Mr Hart.