Oversupply commentary ‘overly alarmist,’ NAB says

In its latest research report A Look at Australia’s Housing Construction Cycle, NAB Economics highlighted that although the apartment construction pipeline is at least two times higher than historical norms in most states, much of the commentary about the situation is “overly alarmist” considering that the industry has shown capacity to “self-regulate” supply.

“Much has been made of emerging risks in the apartment market,” NAB said. “The apartment construction pipeline is at least two times higher than historical norms (relative to population growth) in most states, and prices in some CBD apartment markets (including Melbourne) are already falling.

“That said, much commentary in the public domain is overly alarmist. Lower construction approvals, diminished spare construction capacity and tougher credit conditions are likely to slow the rate of completions.

NAB highlighted that the industry’s previous demonstration of the ability to self-regulate supply is likely to elongate the construction cycle and reduce the risk of a destabilising market correction (although some pockets of the market may still experience excess supply).

According to the report’s analysis of the construction cycle, it may reach its peak as soon as 2018.

“Statistical modelling techniques that take advantage of available information on projects in the construction pipeline suggest that new commencements could drop more than 13 per cent in 2017, 7 per cent in 2018 and a further 9 per cent in 2019.

“If so, dwelling construction would fall 4 per cent a year in 2017 and 2018 according to these models. Such an outcome conforms with our expectation for the construction industry to ‘self-regulate’ the amount of supply coming online.

“That said, our statistical models predict the (large) pipeline of existing projects to run down much slower than would seem likely in practice. Instead, NAB Economics is forecasting dwelling construction to rise another 2 per cent in 2017, before falling around 1 per cent in 2018 and 3.5 per cent in 2019.”

NAB said that overall, most of its indications tend to suggest that the industry has begun to self-regulate the future supply of dwellings hitting the market.

“Building approvals have fallen from their peaks, and while the fall in approvals has not been by as much as we had expected, there are signs that projects previously approved are taking longer to commence.

“This has been particularly apparent for apartments in NSW, where the number of units approved but not commenced has roughly doubled in less than three years – although as a proportion of total approvals, the share tends to be relatively consistent with historical experience.”

It concluded that amid rising concerns around potential settlement risks for new developments, particularly as credit conditions are tightened, it is likely that the construction industry will begin to self-regulate the volume of new supply.

“That would be consistent with past behaviour and can already be seen in the level of new building approvals – although they are yet to fall to the extent that we had expected (and have partially rebounded more recently).

“In combination with other constraints (diminished spare capacity and tighter financing), we could potentially see the construction cycle become more elongated than previously thought – peaking at a lower level, but holding at elevated levels for longer – which would also help to alleviate oversupply concerns.”

[Related: RBA warns of Brisbane apartment glut]