Australia | Feb 20 2014
-Housing to contribute to growth
-Percentage of units increasing
-Shift in materials demand seen
-Interest rates supportive in 2014
By Eva Brocklehurst
New dwelling construction in Australia is expected to increase this year and stay elevated into 2015. Commonwealth Bank economists expect this should improve the alignment with population growth and address some of the affordability problems that have been notable of late. Increased supply will also weaken the upward pressure on rents and prices. Nevertheless, the economists expect changes to house prices and rents will stay varied across the cities and regions, reflecting local economic conditions.
The drivers of the dwelling construction – expected to rise by 8% this year – are continued low mortgage rates, pent-up demand, targeted first home buyer assistance and higher dwelling prices. In turn, improved construction activity should help overall growth and employment. The economists expect a significant contribution to GDP growth this year and forecast 110,000 new detached houses and 71,000 multi-unit dwellings to be built. This should bring construction closer to the CBA economists' estimates of underlying housing demand – at 175-180,000.
Secondary impacts will come down the track from spending on furnishing, white goods and electricals as well as landscaping. So what's different about the upcoming construction cycle? There's a continuing shift to multi-unit dwellings, expected to be around 40% of the total build and up from around 30% a decade ago. This means a shift in the demand for materials as construction processes become more involved – more concrete and steel and less brick, wood and roof tiles. Apartments also mean more elaborate wiring, security, parking and elevators. The demographics are also changing. The ageing of the population is likely to be a determinant in the type of properties that are in demand.
Credit for investors has been rising at a faster rate than owner-occupied credit, which the economists see as a natural response to lower interest rates. The economists expect lending to owner occupiers will increase over 2014 but investor finance might soften and the two growth rates converge. Rental growth has slowed and yields have recently fallen. As more housing comes on line vacancy rates are likely to rise. These factors are expected to result in a slowing of investor demand for housing toward the end of the year.
The main dampening impact on overall demand will come from consumer reluctance to take on more housing debt, in the economists' view. For some time households have been focused on repairing balance sheets and this cautious behaviour has meant the household savings ratio has returned to near 11%, where it was in the 1980s. The economists believe income growth needs to rise for consumers to both maintain savings levels and trade up on housing.
The economists believe the interest rate background will remain supportive this year. They expect the Reserve Bank will start to raise the cash rate in the fourth quarter, but this tightening cycle will be long and drawn out and the peak likely to be lower than in previous cycles. House price growth of 10%, that occurred in 2013, could be repeated in 2014, according to the economists, if mortgage rates remain unchanged this year. This has led them to expect affordability could deteriorate over the year. In terms of rental yields, these are expected to slide in 2014 as vacancy rates and house prices rise. Another impact to affordability is inflation. The economists note inflationary pressures are building. The lower Australian dollar also means imported prices are rising. Part of the problem with domestic inflation is that some of it looks to be structural, according to the economists, which means that substantial falls in prices are unlikely.
One aspect of the pick-up in building demand is that first home buyer lending has weakened significantly in response to changes in government concessions. The economists also suspect that this group is more susceptible to job related concerns and affordability pressures. This needs to change in their opinion before there's a turnaround in lending to this group. On a state basis, the economists think NSW demand will stay high. WA demand is elevated because of high population growth but this could slow at the end of this year, as employment ebbs in line with lower levels of mining construction. Victoria's home lending rose over 2013 but then slowed as the state's first home buyers scheme collapsed. The economists thinks high levels of construction activity in that state indicate that housing lending should pick up once first home buyer activity improves.
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