In the face of a changing property market, investors are wary about the future of the builders’ market, particularly in the softening capital city markets. How will the current levels of building activity affect the state of the market moving forward?
According to Housing Industry Association’s principal economist Tim Reardon, certain parts of the property market in Australia are currently seeing the worst cycle in the builders’ market.
Tradesmen in Western Australia, for instance, believe that the market is seeing its deepest and most sustained downturn in a long time. Some parts of Sydney are also experiencing declines in building activity due to oversupply and other economic factors.
However, Mr Reardon said that, at the end of the day, the bigger picture tells a much better story.
“When we look at the macro numbers, the sky's not falling in. The last four years have been a boom of enormous proportions. Traditionally, we'd build between 130,000 and 180,000 homes per year, but in 2016, we cracked 233,000 homes per year, which is 20 to 30 per cent above the long-term average.
“The fact that we're now coming down off that, by 7 or 8 per cent since 2016, and we're looking at the same decline for the next 2 or 3 years, would normally mean the end of the world for us, but in this cycle that’s coming off an enormous boom, the bottom of the cyclical downturn is going to be higher than any of our previous peaks,” the economist highlighted.
While Mr Reardon assures investors that the downturn of building activity should not be a cause of concern, he strongly encouraged them to take note of the changes in housing demand and supply, particularly across capital cities.
Traditionally, the property market was dominated by detached houses, but in the past ten years, apartments have grown to make up about 30 per cent of the market—a significant increase from 2009’s seven to nine per cent. In the Australian Capital Territory, a whopping 70 per cent of the current market is apartments.
Mr Reardon said: “There's been a material change and that change has come about largely because of planning regulations allowing apartments to be built.”
“Sydney and Melbourne saw that period in the 2000s where the market is full due to planning constraints that didn't allow high-rise apartments to be constructed. That pent-up demand is now being met. The loosening of those restrictions on high-rise apartments has meant we've seen a boom in their development—playing both catch-up and meeting the current demand.”
The surge of apartment development naturally poses a risk of oversupply, but fortunately for some major capital city markets, population growth and overall economic stability suppresses the potential harm to the property market.
Melbourne, for example, sees an astounding 2.3 per cent population growth annually. As the capital city sustains growth above two per cent, Mr Reardon believes that the builders’ market is unlikely to ‘outbuild’ the increasing number of residents despite the current softening state of the Melbourne property market.
“That population growth is dependent on a whole range of things, which includes a variety of different government policy decisions, tax, population growth or net overseas migration and also jobs.”
“Melbourne has had very strong employment growth. It has had an exceptionally strong economy for the past four or five years and it's been welcoming workers from the rest of the country. They picked up just about every worker that left Western Australia after the mining boom,” he said.
As the record-high volume of supply meets the pent-up demand for housing, capital city markets may experience some cooling down in building activity. Regardless of contractions in certain aspects of the market, experts agree that the capital cities’ economic stability will keep the property market afloat.
Further analysing the effect of homebuilding activity on the current market, Mr Reardon pointed the spotlight to rental prices.
According to him, during the June quarter of 2018, rental price inflation dropped to zero—a first since 1994, when Australia hit a record peak in building activity.
Simply put, for the first time in more than two decades, supply and demand in the Australian property market are at equilibrium.
The economist explained: “If you look back just to 2015 where we saw a 7.5 per cent increase in house prices in Sydney, that was, in part, because of all the pent-up demand of the 1990s and the 2000s when supply was restricted.”
“We've now met that housing stock demand, which is why we expect to pull back from the 233,000 supply per year back to 190,000 to 187,000 new homes, which is still a very good number for the building industry.”
While investors would appreciate the equilibrium, homebuilders might have to make some adjustments to continue thriving through the contractions in building activity.
In Melbourne, for instance, new residential developments have been approved in the south-east but the next lot of residential land has become available in the north-west. Due to this, builders would have to get their tradesmen to transfer from the south-east to the north-west.
This shift would naturally have some financial implications. At the moment, prices of timber and cement have started to go up, making the overall cost of homebuilding significantly higher than usual.
According to Mr Reardon: “Because of that volume of homes, we're seeing a cap. As a result, price growth isn't going up as fast as it has done over the past 20 years.”
“That places homebuilders in a difficult situation—they could still be building a record volume of homes but they are finding that the only bit that's left available is in the middle, where their builder's margin is apparently getting squeezed.”
Amidst the shifting dynamics of trend and locations in the builders’ market, Mr Reardon does not expect an exodus of builders any time soon.
In fact, the average builder in Victoria would still have almost two years’ worth of pre-booked work lined up at the moment, while the average Sydney builder has got at least a year’s worth of work on their books.
Despite the difficulties in homebuilding in the current market, the demand for housing and, therefore, builders will remain strong as population continues to grow.
“Trades are still in relatively short supply. Even if we come back another 5 or 10 per cent, we're still going to have the need for more tradespeople than what is available in the market. As a consequence, their prices continuing to go up, but the rate at which that skill shortage exists and the rate at which their prices are going up has fallen back,” Mr Reardon said.
At the end of the day, there is enough work that needs to be done across Australia—enough for both investors and homebuilders to breathe a sigh of relief.
“We've gone from 230,000 starts per year to 215,000 starts per year. Interesting, but shrug your shoulders.”
“Australia’s a great place to live—the land of milk and honey, with 28 years of continuous economic growth,” the economist concluded.