More Building Gloom

By Glenn Dyer | More Articles by Glenn Dyer

In news that won't be greeted warmly in the boardrooms of home building companies, non-residential constructors or among home renters, a leading forecaster says there will be a further decline in activity over the year.

BIS Shrapnel said yesterday that total Australian building commencements will fall four per cent in the 2007/08 year, as dwelling construction remains weak and non-residential building commencements soften.

According to BIS Shrapnel's Building in Australia, 2007 to 2022 report national housing starts are expected to edge down one per cent in 2007/08 to about 148,000.

It will be the fourth year of softness after the slump in the housing boom of the early years of this decade.

"This level of construction is well below forecast underlying demand of around 170,000 new dwellings, which will add to the pressure on residential rental markets," according to BIS Shrapnel.

"In 2007/08, national dwelling starts will be below underlying demand for a fourth consecutive year. As a result, rental markets are now extremely tight in all capital cities, which will lead to further strong growth in residential rents," said report author and BIS Shrapnel senior project manager, Jason Anderson.

"The nation-wide shortage of housing is now translating into rapid rent rises, and the market will gradually respond in the eastern states in 2007/08, prompting the beginnings of a recovery in demand for new dwellings in the first half of calendar 2008. However, a downturn in Western Australia will prevent any recovery at the national level."

While a recovery in dwelling construction is on the horizon, it is unlikely to be a sharp one due to the enduring burden of poor housing affordability. As a result, BIS Shrapnel expects national dwelling starts will remain below underlying demand until 2009/10.

"This outlook means that if the market is left to its own devices, then very tight rental markets will persist for the next four years. Australia's strong employment growth is being supported by a surge in net overseas migration, particularly from temporary workers, but many cities will struggle to accommodate these people over the next few years," warned Anderson.

"The focus for government policy must shift to the inadequate supply of new housing, as the wider economic and social problems stemming from the dwelling undersupply have only begun to develop."

BIS Shrapnel expects dwelling commencements will reach 185,000 by 2010/11, before rising interest rates impact and bring a slight easing in 2011/12. New South Wales and Queensland will experience the fastest growth over this period, due to substantial pent-up demand for new dwellings.

During the past five years, the building sector has been supported by strong growth in the number of commercial and social building projects. Strong employment growth and robust government finances have been supportive of activity in the non-residential segment.

"While economic growth should remain solid in 2007/08, we note that the value of national non-residential building commencements increased by a massive 42 per cent over the five years to 2006/07," said Anderson.

"Hence any downturn in the non-residential building sector will be a softening from a very high level of activity, particularly in the retail and warehouse sectors."

BIS Shrapnel notes that there was a flat profile for total building activity over the four years to 2006/07, which is unusual by historical standards.

"The cycle for total building commencement activity is expected to remain fairly flat until 2008/09, as the industry continues to be squeezed by skilled labour and equipment shortages in some regions. We anticipate this issue will once again become the key challenge for the industry toward the end of this decade," concluded Anderson.

Outlook for building activity by state

New South Wales

Building activity in New South Wales is forecast to show a marginal one per cent rise in 2007/08, followed by a six per cent increase in 2008/09. Following an expected 30-year low in 2006/07, dwelling commencements are set to gradually recover, according to Anderson. However, housing supply will remain below underlying demand, so the tight rental market will persist for the remainder of this decade.

Victoria

Building activity in Victoria was the strongest across all states in 2006/07, rising by eight per cent. Office and retail building is booming, which offset subdued demand for new dwellings. Following two years of expansion, BIS Shrapnel forecasts total building commencements will decrease 11 per cent in 2007/08. Activity will remain at a high level by historical standards however, which will support the level of employment in the industry.

Queensland

Building activity in Queensland has been very strong, rising 40 per cent over the five years to 2006/07. Housing starts and renovations recovered in 2006/07, as the residential property market improved. Anderson expects further growth in housing demand in 2007/08, but anticipates the value of non-residential building commencements will dip from a very high level. Overall building activity will remain strong, so the outlook for industry employment remains very bright.

South Australia

In South Australia, building activity eased by five per cent in 2006/07, following five years of expansion. An increase in all of the residential sectors was offset by a 20 per cent fall in non-residential building, according to BIS Shrapnel. Total building is expected to weaken by a further five per cent in 2007/08. As employment growth slows, alterations and additions (plus five per cent) is the only sector anticipated to record growth in that year.

Western Australia

Western Australia has enjoyed six consecutive years of expansion in buildin

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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