FYI | Aug 03 2009
By Chris Shaw
The Australian residential property market may be about to experience a surge in building activity levels, with economic forecaster and industry analyst group BIS Shrapnel suggesting housing starts could jump by 21% to 160,000 in 2009/10 in what it suggests would be the beginning of a four-year upturn for the sector.
The forecast comes in the group’s “Building in Australia, 2009-2024” report and is based on its view interest rates will stay low for long enough for housing construction to strengthen by enough to offset weaker levels of business investment that are just starting to become apparent.
BIS Senior economist Jason Anderson expects first home buyer numbers will fall as the first home owners grant is phased out, with numbers in this sector expected to decline to around 140,000 in 2010 from a forecast 200,000 this year, a downturn that will come at the same time as business investment levels also decline.
On Anderson’s numbers, the decline in business investment could take as much as 2.8% from GDP in 2009/10, with lower levels of commercial and industrial building commencements to be a major factor in the decline. Stronger residential housing will therefore be needed to offset this fall and for this to occur Anderson takes the view interest rates will need to stay low to attract investors and those looking to upgrade their properties.
Anderson expects standard variable rates will remain below 6.0% through 2010 and it is this expectation that drives his forecast for housing starts. Assuming his estimates on rates are correct, Anderson expects a further 9% rise in building starts in 2010/11 to around 174,500.
Such an outlook means median house prices will also continue to post modest gains, with Anderson expecting an average increase of around 5% for 2010. Such an outcome would be a comfortable one for the Reserve Bank of Australia (RBA) in his view given it is in line with long-term price growth.
Assuming a housing upturn, NSW is best placed to benefit in his view given its undersupply situation is far worse than in other states, but he sees an extention of the temporary halving of stamp duty as necessary for there to a sufficient impact on demand.
Low interest rates will support what has remained strong demand in Victoria, as will what are more generous first home buyer grants than in New South Wales and the fact affordability is better in the Victorian market. But with commercial construction likely to drop sharply in the year ahead Anderson sees overall building activity in the state as relatively flat in 2010.
Queensland is forecast to enjoy a 24% gain in housing starts in 2009/10, offsetting part of the 34% decline experienced in 2008/09. Brisbane should enjoy the strongest rate of expansion as Anderson notes there are more first home buyers in Queensland as a percentage of total households than anywhere else in Australia. Overall though he sees the state’s building sector as relatively subdued given work on apartments, offices and shops are expected to be lower.
South Australia has enjoyed relatively stable dwelling construction levels in recent years, but Anderson sees a 13% rise in dwellings in 2009/10 to 13,900, which would put it above underlying demand of 11,000. Given this BIS Shrapnel expects a modest rate of decline in starts for three years post June 2010.
Dwelling construction in Western Australia is forecast to fall by around 18% in 2008/09, but 2009/10 should see a 20% jump in this number. House prices in Perth should also return to a modest level of growth. Combined with low borrowing costs, Anderson expects this will mean an increase in upgrader demand for new houses.
BIS Shrapnel expects dwelling commencements in Tasmania will be steady in 2009/10 helped by good levels of affordability, while in the Northern Territory only a minor increase in starts is expected, despite a significant shortage of dwellings. Anderson expects upgraders will be active in this market given continued strong price gains in the residential property sector.
Starts have risen by about 11% in the Australian Capital Territory in 2008/09 and demand from both the first home buyer and upgrader segments of the market is expected to remain strong in coming years. At the same time Anderson sees a sharp fall in office construction dragging non-residential construction rates lower.
