Residential Construction Forecast to Slow

The residential construction sector is expected to slow

Residential construction is predicted to decline due to a fall in multi-level apartment building in 2019. The pessimistic outlook can be attributed to two key factors: waning investor interest due to stringent lending criteria and an upswing in construction material costs. Also adding pressure are wage increases and challenges finding skilled staff.

Domestic and foreign investors have been hit with higher stamp duty charges. Last month, the Queensland state budget increased the rate of Additional Foreign Acquirer Duty (AFAD) from 3% to 7%, bringing it on par with New South Wales, Victoria and South Australia. The knock-on effect is falling demand for residential properties amidst rising completions, creating the ideal condition for price depreciation in high density residential property and reducing it’s appeal as an investment option.

Overseas buyers make up a quarter of new home sales in New South Wales and slightly lower in Victoria and about 8% for Queensland. Annually, non-residents invest billions into NSW’s and Victoria’s residential property. However, the contribution can also be attributed to the fact that non-residents who are not Australian citizens cannot purchase existing dwellings. Chinese buyers are the most prominent, followed by New Zealanders.

In a weakening residential market, investors have stepped back creating an opportunity for first-time home buyers and owners seeking to upgrade or downsize their homes to set plans into motion. Rising land prices are likely to have an impact on keeping future housing construction at lower levels.

Advisory group BIS Oxford Economics predicts the biggest fall in residential construction over the next two years, since the 2008 financial crisis. In their Building in Australia 2018-2033 report, the firm expects a 10% decline in building commencements, propelled by a 23% correction in residential starts. However, prospects for non-residential building commencements remain robust – driven by NSW and Victoria – and could rise 5% during the same period. Non-mining infrastructure and an increase in transport infrastructure spend will contribute to the growth.

Australia’s construction sector grew at its slowest pace in over a year, falling 50.6 points in June, the lowest over a 17-month period.

The property boom is definitely over but opportunities still exist if you have a plan and know how to execute.