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Record building activity sounds oversupply alarm – again

Record building activity sounds oversupply alarm – again

Building has commenced on a record number of new dwellings in a fresh sign capital city housing markets are likely to soon reach oversupply.

Building commenced on a record number of new dwellings over the September 2015 quarter, according to the latest ABS figures, in a fresh sign housing markets are likely to soon reach oversupply in most capital cities if they haven’t already.

More than 55,500 dwelling commencements (seasonally adjusted) were recorded in the third quarter of 2015 (Q3 15), an increase of 0.5% from the previous quarter and 2% compared to the same quarter last year. The total value of all new residential building work done hit around $13.55bn, up almost 13% on Q3 14.

A record number of houses and units will likely have been built throughout 2015 once the ABS finalises Q4 figures in April. Michael Workman, senior economist at Commonwealth Bank (CBA), predicts 220,000 commencements by year’s end, dropping to around 211,000 throughout 2016.

As has been typical in 2015, building work commenced on far more new apartments than houses during the September quarter. The ABS reports commencements on units were up 4.8% compared to Q2, but only 0.4% for houses.

Just over 65% of the 194,252 dwellings currently under construction are apartments.

In July, industry analyst BIS Shrapnel warned Australia’s housing stock had already peaked, and slowing population and economic growth could see supply outpacing demand over the next three years, with property prices in most capitals likely to be flat or in decline as a result.

BIS Shrapnel argued the average underlying demand for the next three years would only be around 159,000 new dwellings per annum – about 25% fewer than the number of dwelling commencements predicted for 2016 by the CBA.

Despite acknowledging that “higher supply will add to downward pressures on dwelling prices” this year, however, Workman also argued that the record level of residential construction is a much-needed offset to the decline in mining-related construction activity.

“We believe the strong upturn in the building cycle will continue through 2016 and lift jobs and spending in related parts of retail, like hardware and furniture,” he said.

State by state

New South Wales remains the busiest state for residential building activity, showing an increase of 12% in dwelling starts over the past year. The Premier State was followed by Tasmania (8.5%), SA (5.6%) and Victoria (3.7%), while construction was down 1.3% in Queensland and a big 16% in WA.

Perth real estate had a bad 2015, with dwelling prices falling 3.7% over the year according to CoreLogic while vacancy rates rose.

Where to next?

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.