Housing and the news in 2018

Housing and the economy make the news for downturns and upturns and this year will be the same.


Tim Reardon

The ability of the Australian economy to perform ‘better than expected’ reached superpower proportions in 2017. Building activity drove the Australian economy after the end of the mining boom, but even as housing activity declined, the economy continued to push forward.

The decline in building activity is not uncommon, but for the first time in living memory this hasn’t been driven by a recession, jumps in interest rates or a financial crisis. The cycle has been nudged by the Australian Prudential Regulation Authority (APRA), and state governments with their ill-considered tax hikes on foreign purchasers.

But overwhelmingly the cycle has been driven by market forces: short-term demand has been met so the residential building industry has eased back on the accelerator. Of course there are significant regional exceptions to this picture like Western Australia, the Northern Territory and regional Queensland where their down cycles were driven by the post-resources investment boom hangover.

There is no catastrophe behind the current downturn in residential building, so we see better prospects for national activity to ease rather than collapse in 2018. As always though, a significant driver for consumers to build or renovate is their level of confidence. The year got off to a bad start on this front with yet another media-driven debate about negative gearing and capital gains tax: will prices fall and by how much; and what about rents? As usual all of the experts woke from their new year slumber to contribute to another hasty debate. Pleasingly though, talk of bubbles has mostly gone.

Unhappily this debate about tax reform will go on until the next federal election if not longer. HIA commissioned economic research into these tax issues, which concluded that in the long term prices and rents will both rise from a reduction in the capital gains tax rebate and further restrictions on negative gearing.

There is no catastrophe behind the current downturn in residential building, so we see better prospects for national activity to ease rather than collapse

While this debate goes on the forces driving the need for new homes and renovations will not stop. Over the long haul the demand for new homes is driven by population growth and that will continue at a high level in 2018 on the back of inwards migration. This will be especially important in Victoria where the strong population growth will prolong the elevated levels of home building activity throughout 2018: HIA’s forecasts of a decline in Victorian building, especially in the apartment market, continue to be postponed.

Population growth will also be important in 2018 for the Western Australian and Northern Territory markets. Here population outflows to other states during the resources investment hangover have added substantially to the rate of downturn. There are signs that home building has bottomed in both places as the population outflow has slowed. There are early signs of similar stability emerging in regional Queensland.

Debate will also continue through the year about apartment supplies: media speculation will continue to focus on potential for over-supply especially in inner-Brisbane. In 2018 this question will be definitively answered, as much of the record apartment supply that commenced construction in 2017 will be completed and ready to settle. While there may be local pockets where vacancies increase as this stock comes onto the market, the population growth in the eastern states will absorb this capacity relatively quickly. HIA expects this absorption to happen in an orderly way rather than to precipitate wholesale panic in our housing markets.

Over the long haul the demand for new homes is driven by population growth and that will continue at a high level in 2018
Renovation is expected to lift in the next few years following the growth in home building in the mid-to-late eighties

Throughout the year we will be confronted by media assessments of the latest risk to house prices and the stability of our financial system. The banking royal commission will no doubt provide the doomsayers with plenty of material. The reductions in company tax rates in the United States will also ensure that our own debates about lowering company tax – and whether that will or won’t generate jobs and growth – will also feature highly. There will always be risks to any market but the home-building industry will weather these risks in 2018.

The complexity of housing markets means the commentators will continue to argue about the direction and extent of the impacts of these risks. Compared with the much more significant risks after the global financial crisis, 2018 should see a lowering of the risk environment for the residential building industry. The outlook for economic growth, interest rates, inflation and employment will all provide a positive backdrop to industry activity over the year.

HIA is forecasting an easing in new home building starts over the course of 2018 and into 2019, but the outlook is different for the renovation sector. HIA research has revealed an extraordinarily strong relationship between home renovations activity and the stock of homes which are 30–35 years old. So renovation is expected to lift into the early 2020s following the growth in home building in the mid-to-late 1980s. The growth in the $33 billion renovations sector that should emerge from this age profile of our dwelling stock may be softened by the slow growth in wages, and in some capital cities, competition for trades and supplies from the new home building sector.

In summary, 2018 should be a good year for residential building. Markets that have been down should stabilise and begin to improve while the active east coast markets will ease to more sustainable levels, particularly in apartments.

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