Industry analyst BIS Shrapnel is forecasting national building commencements to show a moderate recovery of eight per cent in 2011/12, after an estimated 12 per cent decline in 2010/11.

According to the company’s Building in Australia 2011 report, the decline in building activity in 2010/11 has been almost entirely due to the winding down of construction related to the “Building Education Revolution” program.

This decline more than offset the emerging recovery in commercial and industrial building.

However, even after the lows brought about during the Global Financial Crisis (GFC), it is the recovery in commercial and industrial building which will help to underpin the growth in 2011/12.

“The continuing recovery in commercial and industrial building — up 21 per cent — will be a key driver of the improvement in building commencements in 2011/12, while increased construction in the health sector — up 73 per cent — will also play a part,” says BIS Shrapnel managing director, Robert Mellor.

“With the Australian economy largely recovering since the GFC, the environment has become more conducive for commercial and industrial development. There is also $7 billion in new hospitals and other health care facilities due to commence in 2011/12, particularly in Victoria, Queensland, South Australia and Western Australia.”

According to Mellor, the contribution from residential building is forecast to be minimal in 2011/12 after being negative in 2010/11. This is due to the decline in activity after the expiry of the First Home Owner’s Grant Boost Scheme, as well as the winding down of the Federal Government public housing stimulus.

The decline will more than offset an otherwise healthy rise in multi unit residential starts. That rise is largely due to the improved financial environment which allows developers to be increasingly able to fund apartment projects.

“The value of new dwelling starts is forecast to remain relatively flat - up one per cent - in 2011/12,” says Mellor.

“Despite weakening net overseas migration inflows, which have fallen from a record 300,000 persons in 2008/09, to an estimated 165,000 in 2010/11, construction nationally still remains below the level of underlying demand, although in some states the market is closer to balance.”

The flat level of construction will set the scene for an improvement in residential dwelling activity in 2012/13. After the lull in 2010/11, economic growth is forecast to strengthen through 2011/12, underpinned by strong rises in resource investment, which will in turn result in higher net overseas migration in response to increasing labour requirements.

Moreover, dwelling activity is now well below underlying demand nationally, with this shortfall focussed in Queensland, Western Australia, and New South Wales.

BIS Shrapnel’s forecast is for two interest rate rises in 2011/12, taking the variable rate to 8.2 per cent at June 2012.

With the rate of economic growth accelerating, this should still be able to support a rise in residential demand in those states where pent up demand pressures are emerging. As a result, the value of new residential building commenced is forecast to rise by 10 per cent over 2012/13.

“The gains are expected to be roughly felt equally across new houses and multi unit dwellings, with the upturn concentrated in Queensland, Western Australia and New South Wales.” says Mellor.

“These states will experience a rapidly rising dwelling deficiency, while affordability has also improved after solid income growth and weak price rises in recent years. In the other states, recent high levels of residential construction has meant that underlying demand and supply is more balanced and there is little upside.”

Residential upturn to be short lived

However, the residential building upturn will be short lived. As investment in the resource sector ramps up, emerging skills shortages will drive wage cost inflation, which will prompt the Reserve Bank to take more aggressive action on interest rates through 2013.

BIS Shrapnel forecasts the variable rate to peak at 9.4 per cent in the second half of the year, which will impact on affordability and induce a downturn in residential construction before the upturn has a chance to play out.

The ensuing economic downturn will result in the value of residential building starts declining by 15 per cent over 2013/14 and 2014/15.

But Mellor says the downturn in residential construction will result in a substantial underlying deficiency of dwellings emerging across most states, while prices in most states are also expected to have declined in real terms and affordability will have improved.

“Through this period, non-residential building is expected to be relatively moderate, and engineering construction building will begin to ease as mining investment projects from ‘Resource Boom Mark II’ are completed.

“Compared to recent cycles, this should free up additional capacity for residential construction into the subsequent cycle and allow new dwelling construction to reach a higher level from 2016. The challenge will be for an adequate level of new land supply to be available to meet this potential upturn in demand.”

A large component of the forecast 17 per cent rise in non-residential building starts in 2011/12 will be the 73 per cent increase in health spending on new hospitals and the expansion of existing hospitals.

As a result, non-residential building is forecast to decline by 10 per cent in 2012/13, with the forecast seven per cent rise in commercial and industrial building not enough to account for the decline in health building, which will subsequently fall back to long term levels. Non-residential building activity is then forecast to remain relatively stable through to 2015/16.

BIS Shrapnel forecasts by state:

New South Wales

In New South Wales total building commencements are forecast to grow 15 per cent in 2011/12 and 14 per cent in 2011/13. Growth in residential construction is anticipated to be very strong over these years, with new dwelling commencements coming off a very low base.

Non-residential activity is forecast to strengthen from the low base in 2010/11, underpinned primarily by rises in commercial and industrial building, while education and health spending are forecast to continue to ease as public stimulus winds down.

Victoria

Total building construction in Victoria is forecast to show moderate declines over the next two years. Residential dwelling starts are expected to begin to fall from their record levels of 2010/11, with pent-up demand pressures easing and rising interest rates impacting on affordability after substantial price growth over the last two years.

A mild contraction in non-residential building is also forecast. Social and institutional building will continue to ease with most federal and state government spending programs having reached their conclusion. The moderate lift in commercial and industrial starts is not expected to be of sufficient magnitude to offset the decline.

Queensland

Total building starts in Queensland are forecast to rise by one per cent in 2011/12 and accelerate by 16 per cent in 2012/13. The combination of the decline in residential activity in 2010/11, and only modest growth forecast in 2011/12, will result in a substantial deficiency that will underpin a sharp rise in residential construction in 2012/13, with both detached house and higher density projects contributing. Alterations and additions will also support building in 2011/12 as housing is refurbished after being damaged by floods and cyclones across the state in early 2011.

Non-residential commencements are anticipated to weaken in 2011/12 as spending on education and health projects winds back to more historically normal levels, before showing a small rise in 2012/13 as commercial and industrial building improves.

South Australia

In South Australia a large rise of 45 per cent is forecast in total building commencements in 2011/12 before declining by 32 per cent in 2012/13. The rise will be entirely underpinned by a rise in health sector building. Outside of this, non-residential construction will otherwise be generally stable.

Modest declines in new residential construction is forecast, with a modest excess dwelling supply translating to an easing in new dwelling construction.

Western Australia

A 28 per cent increase in total building construction is forecast for Western Australia in 2011/12, with a decline of five per cent in 2012/13. The large rise in building will be driven by the non-residential sector, partly through a general increase in commercial and industrial building as business conditions improve, but also by a substantial rise in health building commencements for the year.

The upturn in residential construction is forecast to lag, with little growth in residential building in 2011/12, which will pick up in 2012/13. However, this will only partly offset the drop in health and other social and institutional building in the year.

Tasmania

Total building construction in Tasmania is forecast to weaken by four per cent in 2011/12 and 23 per cent in 2012/13. Both residential and non-residential construction will drive the contraction. Residential construction is anticipated to ease after the high levels of activity in recent years.

Northern Territory

In the Northern Territory growth of 24 per cent and is forecast for total building construction over 2011/12, followed by a decline of three per cent in 2012/13. The rise in 2011/12 will be boosted by a sharp rise in building in the social and institutional sector. Residential building is forecast to show an increase over both years underpinned by rising pressure in the Darwin property market.

Australian Capital Territory

Total building commencements in the Australian Capital Territory are forecast to weaken by 31 per cent in 2011/12 before rising by one per cent over 2012/13. Residential construction is forecast to weaken in this period after running at very high levels up to 2010/11.

Non-residential building will ease after being sustained at a very high level over the 2005/06 — 2010/11 period. The level of non-residential construction is anticipated to fall to a more historically normal level over the next two years.