Australia’s residential building industry is forecast to surge in 2009/10 as it begins a four-year upturn, according new research released today.

The new home market is predicted to experience a 21 per cent in housing starts to 160,000 in 2009/10. However, the strength of the upturn in construction will be dependent on the continuation of very low interest rates, BIS Shrapnel’s Building in Australia, 2009 — 2024 report says.

“We are forecasting interest rates will be kept low until the expansion in housing construction is great enough to offset a deep plunge in business investment, which is only just beginning to become evident,” Jason Anderson, senior economist at BIS Shrapnel, said.

Anderson expects a drop of 30 per cent in the number of first home buyers, slumping from a record number of 200,000 during calendar year 2009 to 140,000 first-home buyers, in calendar year 2010.? ?Critically, demand from first-home buyers will be waning at the same time as business investment falls sharply. Business investment includes commercial building and engineering projects as well as equipment spending, and it currently accounts for 20 per cent of GDP.

“The decrease in business investment is expected to wipe $32 billion, or 2.8 per cent, from GDP during 2009/10,” Anderson said. “To put this decrease in context, it is equivalent to the annual value of national new housing construction.”

The industry analysts forecast the decrease in commercial building activity will be particularly sharp. The national value of commercial and industrial building commencements is expected to show a cumulative decline of 55 per cent during 2008/09 and 2009/10.? ?To compensate for the plunge in business investment the nation will depend on a strong and sustained recovery in residential building activity throughout 2009/10 and 2010/11. To stimulate housing demand from upgraders and investors, interest rates will need to stay low for an extended period.

“Standard variable housing rates are expected to remain below six per cent throughout 2010,” says Anderson. “With interest rates staying very low, housing demand from upgraders and investors is expected to increase enough during the first half of 2010 to compensate for the drop-off in first-home buyers.

“However, a by-product of this is that median house prices will continue to show moderate increases of about five per cent in most cities during calendar year 2010, which is consistent with long-run growth in prices. We think the Reserve Bank will be comfortable with price growth at that level.”

The research predicts the housing construction upturn will have a wide range of effects across the states. New South Wales is best placed to benefit from low interest rates, given the undersupply of housing is far greater in that state. In other states, the housing upturn will be considerable, but offset by a sharp decline in commercial building. The New South Wales building sector is likely to gradually emerge as a relatively attractive location for construction workers for the first time since the Sydney Olympics boom of 2000.

Across the states...

New South Wales

New South Wales is expected to emerge more rapidly into recovery during 2010 than any other state. Housing starts fell to 23,000 in 2008/09, the lowest in more than 50 years. The rebound in Sydney house building is critical to the national economic recovery. Temporary halving of stamp duty on new housing will make an important contribution, but this policy needs to be extended for six months (to the end of June 2010) for it to have sufficient effect on demand. This move would help address the drop in first-home buyer demand during the first half of 2010.

Victoria

Demand for new housing in Victoria has gone from strength to strength, starts rose by eight per cent in 2008/09. Victoria will continue to benefit from the low interest rates that are needed to generate higher housing demand in New South Wales. In addition, State Government first-home buyer grants for new housing are more generous than in New South Wales, despite affordability being far superior. Not surprisingly, this environment will foster further growth in housing construction. However, the housing strength will be substantially offset by a sharp drop in commercial activity, coming back by 26 per cent in 2009/10. Overall, building activity will be close to flat in 2010, so this sector will struggle to offer much to the national recovery next year.

Queensland

In Queensland a substantial 24 per cent rebound in dwelling starts is expected to occur in 2009/10, following a sharp 34 per cent drop in 2008/09. Expansion should be greatest in Brisbane, led by first-home buyer demand, which is likely to be up by 90 per cent in calendar year 2009. There are more potential first-home buyers in Queensland (as a percentage of total households) than in any other state. However, the rebound in detached house demand will be offset by a sharp downturn in construction of apartments, offices and shops. Overall, the building sector is likely to remain subdued well into next year, and not provide many job opportunities for workers who have lost positions in the mining sector.

South Australia

Dwelling construction in South Australia has been remarkably stable over recent years. Going against the national trend, South Australia is expected to see a three per cent increase in dwelling starts over 2008/09. Solid growth is expected in 2009/10, with starts rising 13 per cent to 13,900 dwellings. This level of activity is well above underlying demand of 11,000. BIS Shrapnel is forecasting a three year gradual decline in residential construction beyond June 2010. Non-residential starts are predicted to slip by a further nine per cent in 2009/10.

Western Australia

Dwelling construction in Western Australia is expected to be down 18 per cent, to 18,300 starts, in 2008/09. A solid rebound in dwelling construction is expected from 2009/10, with commencements rising 20 per cent to 21,950. Mild price growth is expected to return to Perth in 2009/10. This trend, combined with low borrowing costs, will help stimulate upgrader demand for new houses. Construction of higher density dwellings is expected to remain restricted until conditions on developer finance ease in 2010. On top of a steep 40 per cent decline in 2008/09, the value of non-residential building starts are forecast to weaken by a further 20 per cent in 2009/10.

Tasmania

Dwelling commencements in Tasmania are forecast to remain steady in 2009/10. Demand was resilient during 2008, which reflects the superior affordability of housing in Tasmania. By the same token, there is unlikely to be much increase in demand. A notable fall back in non-residential building is expected in 2009/10, with weaker hotel and office construction.

Northern Territory

A significant dwelling shortage has developed in the Northern Territory. However, it is forecast that home starts will rise only modestly in 2009/10, up 10 per cent to 1,100. Most of that growth will come through from detached houses, as upgraders respond to the continuing strong price growth for residential property. In addition, the rental market remains extremely tight, so many first-home buyers are expected to enter the market.

Australian Capital Territory

The Australian Capital Territory has been the star performer over 2008/09, with starts up 11 per cent to 2,500 dwellings, the highest annual number since 2004/05.? ?In 2009/10 and 2010/11, the release of first-home buyer and upgrader demand is expected, in combination with the Boost Scheme and low interest rates, to strongly revive demand for new houses. However, this will be countered by sharply lower office construction dragging non-residential building activity lower.