Residential building is “on the threshold of a sharp decline”, courtesy of an “extraordinarily successful regulatory intervention” to discourage investors.
According to BIS Oxford Economics’ Long-Term Forecasts 2017–2032 report, a fall in residential building will see gross domestic product (GDP) growth average at 2.6 per cent over the coming three years. The agency pointed out that the figure is “only marginally better” than the five-year average of 2.4 per cent.
Further, the suppressed growth will have “a substantial flow-on to the rest of the economy”.
“The residential boom has run its course,” Dr Frank Gelber, chief economist at BIS Oxford Economics, said, adding that BIS predicts a fall in commencements of “almost one-third from the peak”.
The fall will be concentrated primarily in high-rise apartments; however, impacts will be felt “across the board”, with a 22 per cent decline in residential building work completed in the coming three years.
“Interestingly, this downturn will not be precipitated by sharp rises in interest rates or ‘credit squeezes’ by the Reserve Bank, which were the triggers of all the previous housing downturns of the past 50 years,” Dr Gelber noted.
According to BIS Oxford Economics, the residential downturn was fuelled by an “emerging oversupply in most residential markets”.
Additionally, the “extraordinarily successful intervention” from the Australian Prudential Regulation Authority (APRA) helped to discourage investor activity through increased interest rates and lowered loan-to-value ratios (LVRs).
In May, APRA introduced a suite of restrictions to limit investor and interest-only (IO) lending. Authorised deposit-taking institutions (ADIs) were directed to limit new IO lending to 30 per cent of all new mortgage lending and limit the volume of new IO loans with LVRs of over 80 per cent.
ADIs were also instructed to keep growth in investor lending to within 10 per cent.
Speaking on the supervisory measures, Dr Gelber said: “By taking the head off the boom, we will end up with less oversupply and a shorter period of absorption before the next upswing.
“We also expect that residential property prices will have a soft landing, with a minor correction but not a collapse, and with less impact on suburban residential than on inner-city high-rise properties.”
The comments come following similar statements made last week by John McGrath, founder and executive director of McGrath Estate Agents.
Speaking at the AussieThink conference on the Gold Coast, Mr McGrath said that the Sydney real estate market is “at least 95 per cent through its current cycle” and predicted a “small correction” for the Sydney and Melbourne markets.
The executive chairman and founder of Aussie, John Symond, added that Sydney – despite having a market touted as a housing bubble – had “effectively had zero growth” between 2002 and 2012.
Mr Symond said: “The growth was less than inflation for 10 straight years ... [but media] focuses on what happened from 2012. On average, if you look at it over the last 15 years, it’s a different story.
“So, I’ve got no doubt that we are not going to hit a property bubble, we’re not going to a bust. The fundamental is that Australia is one of the best countries in the world.”
‘No risk’ of recession
Dr Gelber, together with senior economist at BIS Oxford Economics Richard Robinson, said that despite sluggish GDP growth and flagging residential building rates, there was “no risk of recession”.
“Some commentators are petrified of another financial crisis — forget that,” Dr Gelber said.
“We will not have one while ever we remember the last one. Certainly, there will be cyclical swings with financial impacts. But investment markets are not out of control. We will have to wait a long time for the buoyant conditions that would cause another financial crisis.”
The economists said that “solid but unspectacular” household consumption, weak wage, employment growth and reduced savings ratios were examples of the “mainstays of growth” which “remain in place”.
“Low inflation, weak wages growth and a soft labour market means there will be no rate rises for the next two to three years,” Mr Robinson said.
“As US rates rise and narrow the rate differential, there will be downward pressure on the Australian dollar, offsetting the modest recovery in commodity prices over the medium term. We expect the dollar to fall back from current high levels and average around US 74 cents over the next four years.”