Property News

Downturn tipped to continue

31 October 2006

The downturn in dwelling commencements is expected to extend into 2006/07 as rising interest rates force some households to postpone the purchase of a new dwelling, according to BIS Shrapnel's latest edition of Building Industry Prospects.

BIS Shrapnel predicts national commencements will fall by a further 5% in 2006/07 to 142,500 dwellings, extending the downturn into a third consecutive year, following a 4% drop to 150,500 housing starts in 2005/06.

An anticipated interest rate rise of 0.25% in November 2006, followed by another forecast rise of 0.25% in June quarter 2007, are expected to further depress residential building activity, undoing the recovery in national dwelling construction that was evident in mid 2006.

However, higher interest rates are not the sole source of the under-supply in housing. BIS Shrapnel argues limitations on residential land supply and consequent upward pressure on prices, particularly in Sydney and south east Queensland, have also contributed to challenging affordability and the downturn in demand.

Senior Project Manager, Jason Anderson, said the decline in housing supply is occurring despite an influx of people into Australia through net overseas migration. National population gain through net overseas migration averaged about 130,000 persons per annum in 2004/05 and 2005/06, according to figures from the Australian Bureau of Statistics.

This was the highest net overseas migration gain (over a two year period) since the late 1980s. Long-term visitors, such as people on working visas and overseas students, have been the primary driver of the surge in net overseas migration.

Based on BIS Shrapnel estimates, strong population growth from overseas migration will support underlying demand of approximately 165,000 new dwellings in 2006/07.

However, BIS Shrapnel expects supply will fall well short of this demand.

"The surge in population gain through overseas migration has led to very strong demand for housing, particularly rental properties. As a result, rental markets throughout Australia are as tight as a drum, with vacancy rates in all capital cities below 2.5% as at June 2006," commented Mr Anderson.

"With the supply of new dwellings decreasing, rental markets are set to tighten even further in 2007 and 2008. Dwelling completions will fall sharply in Sydney and Melbourne, which will exacerbate housing shortages," he said.

"The extreme undersupply in the Sydney market will trigger a substantial and extended adjustment to residential rentals. As completions of new dwellings diminish sharply during 2006 and 2007, tighter supply will generate strong growth in residential rents, which will gradually improve rental yields during 2006 and 2007."

"A very large increase in rents is required to improve yields on residential property in order to draw investors back into the market and push up the number of new dwellings back towards underlying demand. We expect average rentals to rise by 5% during 2006, and then accelerate to at least 10% growth per annum over the course of 2007 and 2008. The cumulative increase in average rents in Sydney could be as high as 40% over the five years from 2006 to 2010," concluded Mr Anderson.

In New South Wales, BIS Shrapnel expects commencements to fall by 3% in 2006/07 to just 31,000 dwellings, which would be the lowest number since 1982/83, based on BIS Shrapnel estimates. This would mark the fourth consecutive year of the extended slump in dwelling construction.

Dwelling commencements are expected to show a 9% decline in Victoria in 2006/07, following the 4% decrease in 2005/06. Mr Anderson forecasts higher interest rates will extend the downturn in investor demand for new apartments, although the relatively more affordable average price for residential land should be supportive of demand for detached houses.

Queensland dwelling commencements are forecast to drop 3% in 2006/07. A rebound is warranted, as there is a substantial deficiency of new dwellings in south east Queensland, but BIS Shrapnel believes higher interest rates will keep the affordability barrier high and thereby constrain demand.

Activity has been steady in South Australia over the past three years, defying the national downturn. South Australia has benefited from the boom in net overseas migration, as its share of the population gain has risen to 6%, compared to 3% just three years ago. A more affordable housing market has attracted a greater number of overseas migrants, supporting dwelling construction at a high level by historical standards. BIS Shrapnel forecasts dwelling commencements to decline by 9% in 2006/07, as higher interest rates lead to softer demand from investors.

A strong 12% upturn in dwelling starts in Western Australia in 2005/06 contrasted with the enduring decline in the eastern states. However, Mr Anderson said a 4% decrease is forecast for 2006/07. Affordability has deteriorated rapidly in 2005/06 and is now worse than any other capital city with the exception of Sydney. In particular, a cumulative 40% rise in building costs over the past three years has damaged affordability of new dwellings. In this context, BIS Shrapnel forecasts dwelling commencements in Western Australia to decline by 4% in 2006/07.

Tasmania's affordability advantage diminished in 2004/05 and dwelling commencements fell by 9% in 2005/06. With interest rates rising, BIS Shrapnel forecasts a further 6% drop in 2006/07.

The Northern Territory is currently experiencing a solid upswing in residential markets, with strong growth in residential property prices. However, higher interest rates are again expected to dampen demand, given the importance of investor financed activity to the current cycle in the Northern Territory. An 8% decline in starts is forecast in 2006/07.

Commencements in the Australian Capital Territory plunged by 25% in 2005/06. This drop is believed to be due to softening investor demand for new apartments, in an environment of weaker property price growth and higher interest rates. BIS Shrapnel forecasts a further 5% decline in dwelling commencements in 2006/07.