e co n o m y where to from here ?
geordan murray HIA Economist
At times throughout 2015 , we questioned whether the negative commentary about Australia ’ s economic growth prospects was warranted . That question appears easier to justify in early 2016 ; Australia ’ s economy is in better shape than many give it credit for .
A positive change in labour market conditions has been one of the most significant developments , contrary to widely held expectations that the labour market would deteriorate as 2015 progressed .
The second half of 2015 saw strong growth in the number of people employed and a fall in the unemployment rate . While the official labour market statistics have been interpreted with caution , the more positive labour market conditions are also evident in figures tracking job vacancies and advertisements .
While households are not seeing real growth in incomes , the perception of improved job security is likely to have had a positive influence on consumer sentiment - evident in the December 2015 quarter Gross Domestic Product ( GDP ) result , where growth in household consumption provided one of the strongest contributions to overall growth .
The strong contribution from the household sector , along with a positive contribution from residential building , boosted Australia ’ s annual rate of economic growth to 3.0 per cent during the December 2015 quarter .
In terms of residential building , the strongest quarters on record for new home starts all occurred during 2015 , and we only have data through to the end of September . With all indicators suggesting the December quarter was also exceptionally strong , the full 2015 calendar is poised to post a total of around 220,000 commencements .
The unprecedented level of apartment building has provided the primary impetus for achieving the record annual total , although detached dwelling construction has also been performing well .
The level of detached dwelling commencements is consistent with the quarterly levels that have been recorded since early 2014 . This provided around 114,442 detached dwelling commencements during the year to September 2015 , which is the strongest 12 month performance since 2010 . However , the current peak is short of previous peaks like those in 1989 , 1994 , 2000 and 2004 . In contrast , the number of ‘ other dwelling ’ commencements broke through the 100,000 mark to post a record annual total of 100,874 during the year to September 2015 .
Approvals continue to outpace commencements , although the backlog of dwellings that have been approved but have not yet commenced fell slightly during the quarter . Nevertheless , this backlog remains significant , totalling over 33,000 at the end of September . Almost one half of the total national backlog is located in New South Wales with over 15,600 approved dwellings awaiting commencement . Victoria also accounts for a substantial share , with 6,100 approved dwellings awaiting commencement at the end of September .
We project that the 2015 calendar year will represent the peak for new home starts in this cycle . Since we are now at the top of the cycle , considerations about the future centre on how long we can stay near the top , what may cause activity to decline , when the decline will happen and how quickly it will develop … and ultimately how low will it go .
HIA Economics projects that activity will begin to decline slowly during the latter part of 2016 , with the reduction in activity accelerating during 2017 and bottoming out in the 2017 / 18 financial year at around 160,100 starts .
This projection is based on our assessment that there will be an influx of supply at times when softer overseas migration takes some of the heat out of demand for housing more broadly . In addition , there is growing concern about the sustainability of demand from investors ( both domestic and foreign ) in an environment with less positive price signals , constrained and costlier credit , uncertainty about the tax treatment of rental losses , and the potential impact of greater restrictions on capital flows leaving China .
The outlook for 2015 / 16 has been upgraded from around 200,000 starts to around 213,000 , reflecting stronger than anticipated approvals throughout the final months of 2015 .
Looking further ahead , the outlook for 2016 / 17 has also been bumped up from 173,500 to 182,700 . While it appears to be a relatively large upgrade , the decline in percentage terms is largely the same as previously forecast .
We anticipate a cyclical low of 160,100 commencements to occur in 2017 / 18 which equates to a fall of 12.4 per cent from the level forecast for 2016 / 17 . This represents a slightly deeper trough than the 163,300 we had previously forecast and is also projected to occur a year earlier .
New home building is expected to be disproportionately hit by the downturn in activity . We project that multi-unit commencements will peak at 101,500 during 2015 / 16 and reach a trough during 2017 / 18 , some 37.9 per cent lower than the peak . From a peak of 113,900 in 2014 / 15 , detached house commencements are forecast to decline by 14.7 per cent to a trough of 97,080 in 2017 / 18 .
The key message is that 2016 will be a good year for residential building , without being the best . From a national perspective , the relatively upbeat short term outlook we have had for some time still appears safe . However , it ’ s now far less clear how much longer we will be able to keep saying that . We find ourselves coming off a record upcycle from which there will inevitably be a decline .
12 Australian Window Association