The national downturn in dwelling commencements is expected to extend into 2006/07 as South Australia and Western Australia also begin to slow after historical highs, bringing them in line with the rest of the country.
Economic and industry forecaster, BIS Shrapnel, predicts that commencements will fall six per cent in 2005/06 to 147,000 dwellings, and edge down a further three per cent in 2006/07 to 142,250 dwellings across Australia.
In the latest edition of its monthly bulletin Building Industry Prospects, BIS Shrapnel noted that the national pattern of commencements will mask different trends at the state level.
Senior Project Manager Jason Anderson explained that the national decline forecast for 2006/07 will also be driven by a downturn in South Australia and Western Australia, where commencement activity has exceeded underlying demand and subsequently must come back toward balance.
Conversely, New South Wales and Queensland commencement levels have failed to meet underlying demand due to land constraints and affordability barriers - issues which will not be resolved during the next two years.
BIS Shrapnel's outlook for dwelling commencements state-by-state is as follows:
In New South Wales, dwelling commencements are expected to fall by 14 per cent in 2005/06, which will be substantially below BIS Shrapnel's estimate of underlying demand for new dwellings. This ongoing slide in house commencements is due to a conjunction of negative forces, including land constraints and dampened demand from upgraders due to the downturn in residential property.
The latter process has spread beyond Sydney, and BIS Shrapnel is forecasting house approvals in the Hunter and Illawarra regions to show double-digit declines in 2005/06. Looking further ahead, Mr Anderson expects a marginal one per cent decline in dwelling commencements in 2006/07, so that supply falls further below underlying demand.
Dwelling commencements are expected to show a 10 per cent decline in Victoria in 2005/06, as a slowdown in residential property turnover constrains upgrader demand for new houses, and a drop in starts of inner Melbourne apartments continues, according to Mr Anderson.
In 2006/07, BIS Shrapnel forecasts a further six per cent decrease in Victorian dwelling commencements. In contrast to New South Wales and Queensland, new dwelling construction in Victoria has been in line with underlying demand. Mr Anderson anticipates pockets of excess supply will depress demand for new dwellings in some markets, particularly in the inner Melbourne apartment market.
Queensland dwelling commencements are forecast to drop four per cent drop in 2005/06 - much less than the slide expected in New South Wales or Victoria.
Housing affordability remains an issue in South-East Queensland, but construction in north Queensland is booming as affordability is more favourable and employment growth has been very strong, the report shows.
In 2006/07, dwelling commencements are forecast to be steady. 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.
The downturn in activity, evident in the three eastern states during 2005, is now emerging in South Australia. BIS Shrapnel forecasts dwelling commencements to decline by six per cent in 2005/06.
Residential property price growth slowed from 12 per cent in 2004 to just three per cent in 2005, according to Mr Anderson. As a result, upgrader demand for new dwellings is ebbing.
In addition, there is some risk of over-supply of new dwellings in regional South Australia, where construction has been running at a very high level by historical standards, boosted by investor demand and holiday homes, according to BIS Shrapnel. With property price growth slowing, Mr Anderson expects demand fundamentals to come to the fore in 2006/07, and lead to a nine per cent drop in the number of residential commencements.
A strong upturn in Western Australia in 2005/06 has been supported by affordability and demographic fundamentals in that state. BIS Shrapnel is forecasting a 12 per cent pick-up in dwelling starts in 2005/06 due to rising property prices and very strong upgrader demand.
This conjunction is unusual amongst the states, and Mr Anderson believes it points to a pick-up in population growth. BIS Shrapnel expects underlying demand to rise in 2006/07, as net interstate migration becomes more favourable due to employment opportunities in the resources sector.
The potential constraint on activity is affordability, which has deteriorated rapidly in 2005/06. Affordability in Perth is now close to the level that Melbourne and Brisbane reached in 2004, after which price growth slowed sharply and demand for new dwellings fell.
Furthermore, Mr Anderson believes the 10 per cent per annum rise in building costs during 2004 and 2005 is now leading to capacity constraints that are generating very high growth in building costs.
In this context, BIS Shrapnel forecasts dwelling commencements in Western Australia to decline by four per cent in 2006/07.
The very positive effect of Tasmania's net interstate migration inflow, which drove solid growth in commencements in 2003/04, is now ebbing, according to Mr Anderson. Tasmania's affordability advantage diminished in 2004, and dwelling commencements are set to fall by 13 per cent in 2005/06.
Commencements are currently close to underlying demand, and BIS Shrapnel forecasts a marginal four per cent drop for 2006/07.
The Northern Territory is currently experiencing a solid upswing in residential markets, with strong growth in residential property prices.
The Territory's population growth is expected to rise substantially in 2005/06, with net interstate migration forecast to show a net inflow in 2005/06, according to Mr Anderson. In addition, growth in investor demand in Darwin has lagged the national upturn, as investor interest shifted to regional markets which has solid underlying demand fundamentals and a lower affordability barrier.
BIS Shrapnel forecasts a 19 per cent rise in dwelling commencements to 1,550 in 2006/07.
BIS Shrapnel expects commencements in the Australian Capital Territory to fall a sharp 41 per cent in 2005/06, to just 1,450 dwellings. This drop could be due to a surplus in new dwellings, and it is expected that the number of new apartments will plummet in 2005/06 to just 500, down from a peak of about 1,600 in 2003/04. BIS Shrapnel forecasts a modest seven per cent rebound in dwelling commencements in 2006/07.
