Home > BIS Shrapnel forecast flat building outlook will take pressure off interest rates

BIS Shrapnel forecast flat building outlook will take pressure off interest rates

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Industry analyst and economic forecaster, BIS Shrapnel , is forecasting national building commencements to be close to flat in 2010/11 and 2011/12.

BIS Shrapnel's Building in Australia 2010 report notes that as the positive effect of fiscal stimulus programs fades, there will be less upward pressure on interest rates. Relatively favourable interest rates will allow apartment construction to become a key driver for economic growth over the next two years.

“Federal government stimulus programs were largely responsible for the strong 15% rebound in the national value of total building commencements in 2009/10,” says BIS Shrapnel Senior Economist, Jason Anderson.

“The First-Home Buyer Boost Scheme, social housing and the Building Education Revolution programs were vital to the recovery in the building pipeline, following the 18% plunge in starts during 2008/09,” he adds. 

BIS Shrapnel is forecasting support for the building industry from Federal Government spending to fall away during 2010/11 and 2011/12, and Anderson says the effects of this can already be seen.

“First-home buyer numbers are down by 50% over the first half of 2010, compared to the first half of 2009, and non-residential building approvals have trended down sharply over the past six months,” he says.

BIS Shrapnel predicts there will be two major drags on economic growth in 2010/11:

  1. a substantial 27% decline in net overseas migration to 175,000 people, which will constrain retail sales growth
  2. a 3% drop in private sector non-residential construction (non-residential building plus engineering construction), which is considerably worse than the Commonwealth Treasury’s latest forecast for a 7.5% rise.
“In this environment, we are predicting only two rate hikes by the Reserve Bank of Australia in 2010/11, with the first coming towards the end of 2010,” says Anderson.

Continuation of relatively favourable interest rates should encourage a recovery in first-home buyer numbers over the first half of 2011. A revival of first-home buyer demand would give residential property markets a second wind, and buoy upgrader and investor demand for new dwellings. In turn, BIS Shrapnel expects national home renovation expenditure will show solid growth of 6% in 2010/11.

Apartment projects are also expected to deliver a substantial upside for the national economy during 2010/11, and into the future. The national number of private sector medium and high density dwellings has remained very low over the past few years so BIS Shrapnel is expecting a pick up. On the other hand, the number of private house commencements has been strong, with 2009/10 seeing the highest annual level since 2003/04, a rise that should remain solid.

“Prospects for a sustained recovery in residential building activity are heavily dependent on demand in New South Wales and Queensland,” says Anderson.

“Stamp duty relief for new dwellings in New South Wales is expected to encourage a strong upturn in starts of apartment projects from 2010/11.

“More apartments would help to address housing shortages across Sydney - particularly in Western Sydney, where average population growth over the past 10 years has been weak on average, due to the lack of new housing.”

BIS Shrapnel says part of the rationale for an extended recovery in apartment construction is that developers will have limited opportunities emerging from the non-residential building sector.

“We are forecasting national non-residential building starts to drop by 14% in 2010/11 and 5% in 2011/12, reaching the lowest level since 2005/06,” says Anderson.

“This outlook is an inevitable consequence of education project stimulus phasing down, but is also due to a slow recovery in the number of major commercial and industrial building projects.

“The overall mix of building and construction activity provides a near-term opportunity for developers of residential projects. Softness in non-residential building should result in more competitive tendering and cost benefits for apartment projects.”

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