Overview:

• Dwelling investment in Australia has made a sizeable contribution to GDP growth in recent years. However, indications suggest that the construction cycle may soon reach its peak and could detract from economic growth as soon as 2018. Statistical modelling techniques that take advantage of available information on projects in the construction pipeline, suggest that new commencements could drop more than 13% in 2017, 7% in 2018 and a further 9% in 2019. If so, dwelling construction would fall 4% a year in 2017 and 2018 according to these models. Such an outcome conforms with our expectation for the construction industry to ‘self-regulate’ the amount of supply coming online. That said, our statistical models predict the (large) pipeline of existing projects to run down much slower than would seem likely in practice. Instead, NAB Economics is forecasting dwelling construction to rise another 2% in 2017, before falling around 1% in 2018 and 3½% in 2019.
• Much has been made of emerging risks in the apartment market. The apartment construction pipeline is at least two times higher than historical norms (relative to population growth) in most states, and prices in some CBD apartment markets (including Melbourne) are already falling. That said, much commentary in the public domain is overly alarmist. Lower construction approvals, diminished spare construction capacity and tougher credit conditions are likely to slow the rate of completions, and the industy has previously shown capability to self regulate supply. This is likely to elongate the construction cycle and reduce the risk of a destabilising market correction – although pockets of the market may still experience excess supply.
• On the demand side, the fundamentals remain quite strong, supported by solid population growth, especially in Victoria, although measures are in place to slow investor and foreign demand. Indicators of foreign demand are limited, but the NAB Residential Property survey suggests that policies aimed at deterring foreign buyers (including tighter constraints in foreign jurisdictions) are having an impact.In addition, the longevity of the current resilience in investor demand is difficult to gauge. Recent macroprudential policities (mainly targeting interest-only mortgages) are yet to fully take effect, while changes to capital requirements have already been flagged by APRA. The longer-term effictiveness of such policies, however, is still up for debate.
• On balance, there is a high degree of pent up demand in some markets, especially Sydney, which combined with expectations for solid popuation growth, should help to soak up much of the new housing stock. That said, NAB projections see the national housing market becoming (modestly) oversupplied by late 2018 (although the timing varies by state). Additionally, with much of the construction centred in apartments, it remains to be seen whether that aligns with buyer preference, while there are also concerns over the quality of some of the new apartment stock.
• There were a raft of (mainly supply-side) policies in the 2017-18 Federal Budget. While these will add to construction activity in the out years, the net impact is expected to be somewhat marginal.

See the attached document for details:

• Housing Construction Cycle:  May 2017 (PDF, 358kb)