Construction heading for 'worst crash since GFC'

Construction heading for 'worst crash since GFC'

After years stimulating the economy, the construction industry could become a major drag on activity as it faces the worst downturn since the GFC, says BIS Oxford Economics.

The economic analyst and forecaster predicts the latest downturn is likely to be driven by a 50 per cent slump in the apartment market over the next two years.

According to BIS's Building in Australia 2018-2033 report, a sharply weaker residential market will lead to an overall fall in construction nationally of 10 per cent.

Residential construction starts are tipped to fall as much as 23 per cent, with high land prices, slowing migration and evaporation of investor demand potentially adding fuel to the fire.

The residential downturn will swamp forecast gains of 5 per cent in non-residential construction over the next two years.

"The building sector is switching from being a strong growth driver to a drag on the economy," says Adrian Hart, the associate director of construction, maintenance and mining at BIS Oxford Economics.

"Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, which is set to fall 50 per cent.

"The very mild drop in residential commencements in 2017-18 is just the beginning."

Hart says the key driver of the residential downturn will be falling investor demand and, although there will be a modest easing of property prices, apartments are likely to face the worst of it.

"Domestic and foreign investor demand is weakening in the face of tougher lending criteria and increased foreign buyer charges," Hart says.

"In turn, falling demand and rising supply (completions) is driving lower house prices, which also affects the attractiveness of housing as an investment asset.

"While price falls are expected to be modest, the high concentration of investor demand in attached dwellings will see this part of the market fare worst of all over the next two years."

BIS is expecting the market trough in 2019-20, although it notes that the market will not reach the depths of the GFC.

It says the real value of national building commencements in 2017-18 rose 5 per cent to $118.5 billion, which was 35 per cent higher in real terms than the low reached in 2011-12.

BIS notes that while construction activity varies from state to state, with Tasmania, and Victoria recording double-digit growth this past year, it warns that as the apartment boom goes bust those states with the biggest increases are likely to experience the biggest corrections.

It is forecasting a slump of 29 per cent in Victoria, 27 per cent in ACT, 26 per cent in NSW and 15 per cent in Queensland over the next two years.

These states combined have posted a record 80 per cent of construction starts in the apartment market.

"While there are local pockets of oversupply, only Western Australia and Queensland are experiencing a significant net oversupply of dwelling stock at a state level," says Hart.

"With stock deficiency to start rising nationally again from 2019-20, we anticipate a renewed upswing in residential building starts through the early to mid-2020s.

"But we could experience a deeper downturn before then, and a delayed recovery, if fundamental drivers of residential activity, such as net overseas migration or investor demand, were to ease more than expected."

Meanwhile, BIS forecasts that the value of non-residential building commencements will remain in positive territory, although slowing to just 5 per cent over the next two years.

That's off the back of a cumulative rise of 51 per cent over the past three years to an estimated record $46.38 billion in 2017-18.

"We are still seeing strong investment cycles play out in the non-residential building market," says Hart.

"The resources boom drew industry and employment to the mining regions. The pendulum has swung back the other way over the past few years, with weakness in the resource sector, a lower dollar and improving service sector conditions supporting new commercial and industrial developments, particularly in NSW and Victoria."

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