‘Tsunami of supply’ to hit housing markets

According to BIS Shrapnel’s Building in Australia 2016-2031 report, national dwelling commencements are estimated to have reached their peak over 2015/16 and will begin to decline from this level in the coming year.

“After recording strong growth during the past four years, we estimate that total dwelling starts reached an improbable 220,100 in 2015/16, an all-time high,” associate director of BIS Shrapnel, Dr Kim Hawtrey, said.

“From this level, national activity is forecast to begin trending down over the following three years, with the high-flying apartments sector leading the way down.”

According to Mr Hawtrey, while a sizeable dwelling stock deficiency coupled with record low interest rates drove building activity to its current highs, almost all major markets will soon shift into oversupply.

“Low interest rates have unlocked significant pent-up demand and underpinned the current boom in activity, but with population growth slowing and a strong backlog of dwellings due for completion, new supply will outpace demand,” he said.

“This will see the national deficiency of dwellings gradually eroded and most key markets will begin to display signs of fatigue.”

The only exception is NSW, which is expected to remain undersupplied for some time yet. However, according to BIS Shrapnel, a slowdown in home building is expected there too.

“Sydney is up against an affordability ceiling as well as constraints on site availability,” Mr Hawtrey said.

“Investor demand is cooling, and the city will see a surge in new supply coming on stream over the next one to two years.”

In the company’s latest forecasts, net overseas migration is expected to continue its recent downward trend for the next few years in response to soft economic growth post-mining boom, resulting in a weaker outlook for population growth.

However, the report suggests residential building activity has continued to grow and new dwelling completions have pushed above the underlying demand for dwellings.

Based on BIS Shrapnel assumptions about household formation per thousand head of population, the report estimates the national dwelling stock deficiency reached a peak of around 117,000 dwellings by June 2014. After a strong boost to home construction, this deficiency has reportedly halved to approximately 58,000 as at June 2016.

Despite reaching their peak in 2015/16, new dwelling starts are expected to continue to track at a historically high level over the next 12 months. Low interest rates will continue to support demand, with momentum expected to remain a force across the national market.

“While we are forecasting a fall in activity from its current peak, this will mostly be felt in the higher density segment of the market,” Mr Hawtrey said.

According to Mr Hawtrey, after climbing to over 100,000 starts, there will be an inevitable adjustment in the attached dwellings sector as they move back to more sustainable levels.

“New commencements of multi-residential dwellings are forecast to fall by 50 per cent over the next four years, from around 107,000 currently to just 53,800 by 2019/20,” he said.

“With investors facing finance restrictions and first home buyers sidelined, it will be up to upgraders and downsizers to help cushion the decline in activity.

“But we’re not confident, given that the national stock deficiency will have been largely satisfied by 2017.”

[Related: Unit construction activity rises, completions down]