The “quadrella” of conditions that assisted the “winning streak” of residential construction is set to wind down along with foreign apartment investment, Master Builders Australia has said.
Foreign investor activity is set to fall “considerably” over the 2017-18 period, with foreign buyer-supported apartment commencements in the Sydney market expected to fall from the 2015-16 peak of nearly 50,000 new dwelling commencements to below 30,000 in 2017-18, MBA reported in its latest building and construction forecast.
“There is a risk that lending restrictions and changes to foreign ownership laws bite at the same time interest rate hikes take some purchasing power off prospective domestic homebuyers,” MBA said.
“Housing demand also faces risks from the buyer side as regulators look to curtail investor activity and government policy puts foreign buyers in the crosshairs.”
Earlier this week, the federal government announced draft legislation that would crack down on tax exemptions available to foreign residents and their properties, as reported by The Adviser’s sister title, Smart Property Investment. This is in addition to the 2017-18 federal budget, which tightened capital gains tax (CGT) rules for foreign buyers as well as imposed a 50 per cent cap on pre-approved foreign ownership in new developments. Also, dwellings owned by foreign owners that go uninhabited for greater than six months each year will be taxed at least $5,000 depending on the original application fee.
Along with a fall in foreign investment, overall residential construction is set to fall, as the combination of high population growth, high foreign investor demand, high dwelling price growth and low interest rates that led to strong rates of residential construction in the 2015-16 period wanes.
Residential construction is “fast approaching its peak”, MBA reported, as new housing commencements are expected to fall to 180,000 in the 2018-19 period from the 230,000 new dwelling commencements reported in the 2015-16 period.
“However, it is important to note that the expected trough in new housing commencements in 2018-19 of 180,000 new dwellings is well above the past decade average of around 165,000 new dwellings, and is higher in terms of total commencements than any year before 2013-14,” MBA noted.
“Indeed, for the next decade, new housing commencements will need to top 180,000 each year just to keep pace with population growth. More housing will need to be built if we also want to fill the housing shortfall, which is currently estimated at around 100,000 dwellings.”
The association pointed to the fact that vacancy rates in the Sydney and Melbourne apartment markets have remained “very low”, despite record construction activity, as evidence that the housing market could sustain another cycle of residential construction activity.
The Housing Industry Association (HIA) reported on 26 July that demand for tradesmen in east coast cities remains strong, despite the slowdown in building activity.
Tim Reardon, the HIA's principal economist, said the shortage of tradesmen was not consistent countrywide – the greatest shortage persisted in the markets that “still have high levels of home building, such as Sydney and Melbourne”.
“Strong population and economic growth in Sydney and Melbourne are continuing to drive building activity in these areas and draw in trades from other jurisdictions.
“On the other side . . . is Western Australia. The slowdown in the residential building activity has been significant and represents a considerable change from the state of play in the construction workforce a couple of years ago."
Breaking down the numbers
According to the MBA figures, the 2015-16 period saw houses make up 48 per cent of all residential construction completed, followed by “other dwellings” with 40 per cent and renovations making up 12 per cent.
In the 2016-17 year ended June, the chain volume measures of residential building and construction work done rose by 1.9 per cent, to $70,615 million.
However, the 2017-18 period will see the figure fall by -7.6 per cent, to $65,261 million, and -4.8 per cent in 2018-19, to $62,214 million.
The 2014-15 period saw an 11.5 per cent growth in the dollar value of building and construction work done ($62,005 million), followed by an 11.8 per cent growth in 2015-16 ($69,291 million).
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