Commencements to slow
In some markets and circumstances, declining dwelling commencements can be a fair indicator that prices may be about to follow suit.
I don’t want to generalise too much here, because there are of course different sub-markets and sectors.
Nevertheless, note how in Western Australia the dwelling price index peaked in Q1 2014, stalled in Q2 2014, before losing its mojo and beginning to decline in the third quarter of that year, by which time dwelling starts were already on their way down as builders had anticipated the downturn.
Why does this happen?
Predominantly because developers have become aware that demand is fading, and are understandably reluctant to commence a project if the sale of the end product for an acceptable profit is in doubt.
House commencements robust
Detached houses on average take 6 to 8 months from commencement to completion, although sometimes a bit less than six months in the sprawling greenfield sites of Queensland and the Northern Territory.
In Western Australia, detached house commencements peaked in the middle of 2014 as it became increasingly clear that the resources sector was slowing significantly and demand for housing was dropping.
Elsewhere commencements for detached homes remain fairly robust in trend terms, while in Victoria sentiment appears to be positively serene.
With variable rate home loans available from well under 4 per cent buyers for new homes in Melbourne should be sourced reasonably comfortably over the next few quarters.
Progressively through the cycles, Sydney is increasingly struggling to provide new build houses at affordable prices – the successive peaks in new house construction are falling – except out towards the western and south-western city fringes where infrastructure is painfully sparse and demand for housing inherently lower.
Other dwellings – units
The dynamic for the market in attached dwellings is markedly different!
This construction cycle has seen the approval of more high density and ‘high rise’ apartments than ever before.
A unit or apartment project might take 15 to 21 months on average to be completed from the point of commencement, which in part explains why completions have taken so long to have an impact through this cycle.
In Sydney and Melbourne it is usual for apartment projects to take more than 24 months to complete on average, largely due to brownfield site remediation challenges (the figure is much lower in Queensland, for example, at around 19 to 20 months).
With lead times for new apartments so much longer, developers are often required to ensure a certain percentage of pre-sales before project financing can be secured.
Commencements of attached dwellings remain strong in New South Wales.
Overall, in fact, we should expect attached dwelling commencements to remain higher than their long run averages in Sydney (on average, through the cycle), since over the last three decades fewer houses are being constructed, while population growth today is typically higher. For now at least.
The Reserve Bank of Australia (RBA) provided some useful analysis of how many inner city apartments are expected to be completed in the next two years.
In Sydney the number is 10,000, representing a relatively low share of the established dwelling stock when compared to other cites.
Sydney’s construction boom is quite widely dispersed, although as usual there will only be a comparatively small increase in the dwelling stock in the beachside eastern suburbs or the treasured garden suburbs of the lower north shore.
In LGAs such as Parramatta, on the other hand, there are still thousands more apartment completions expected, and the north west is another region that is expected to suffer from oversupply.
Source: Reserve Bank
In Melbourne (16,000) and Brisbane (12,000) the number of expected inner city apartment completions is both higher and more concentrated, and as such will also represent a greater percentage increase in the dwelling stock.
This has been well enough known for some time, not least by developers with their ears to the ground.
Sure enough, total attached dwelling commencements are now in decline in Victoria and Queensland, while in Western Australia they peaked all the way back in 2014.
In the southern states the figures for attached dwellings are relatively immaterial, and thus are not included for discussion here.
In both Melbourne and Brisbane it is easily possible to find plenty of examples of apartments being resold for less than they were initially bought for ‘as new’, a sure sign of the impending downturn.
Attached dwelling commencements are likely to decline further through 2017 as developers fear that new off-the-plan purchasers are at risk of not settling, particularly those based offshore.
To date, non-settlements have reportedly remained low, and material losses to banks have not yet resulted.
In theory – at least in areas and property types that people actually want to live in! – while credit remains available markets should be self-correcting in time as dwelling commencements fall, and buyers sensing bargains populate the newly supplied markets.
The Reserve Bank took a detailed look at the apartment sector in its bi-annual Financial Stability Review, and concluded:
“Any oversupply in Australia would be more localised to certain geographic areas, and potential price falls tempered as the population moved to absorb the new (and cheaper) supply of housing in these areas over time.”
Of course, central banks rarely predict catastrophes, for fear that they may become self-fulfilling.