Queensland recovery, resources boom to boost housing starts by 6% in 2011-12: BIS Shrapnel

Residential building starts will increase by 5% to 171,000 during 2011-12 as economic growth and recovery efforts in Queensland help sustain the building industry, a new BIS Shrapnel report forecasts.

Growth will be concentrated in resource-rich states, BIS says, with Western Australia expected to see a 6% rise in overall building commencements during 2011-12 to a total of $10.9 billion.

Angie Zigomanis, senior manager of building and construction at BIS Shrapnel, says the report shows the effect of the First Home Owner’s Grant in 2009, which brought forward purchases, is now starting to subside.

“It does seem optimistic for a forecast, but we’ve seen quite subdued activity in the housing commitments area.”

Total starts are expected to fall by 3% in 2010-11, with alterations and additions expected to remain unchanged.

But as first home owner demand increases, dwelling starts will grow by 6% in 2011-12, the report predicts. A combination of strong economic growth, high employment and low vacancy rates will provide demand for high-density dwellings.

“Loans to first home buyers are expected to be getting back to normal levels of 10,000 to 11,000 per month by the end of the year, equating to 120,000 to 130,000 per annum—around the average of the last five-six years,” the report states.

“The rise in first home buyer demand is expected to result in increased turnover across the board, as
upgraders will have a stronger market to sell their existing dwelling into. Many of these will trade up to a new dwelling, facilitating growth in new house commencements in 2011/12.”

Growth will be highest in Queensland, New South Wales and Western Australia, Zigomanis says, where resource companies will fuel much of the growth – especially in Queensland where natural disasters have ravaged rural towns along with many properties in Brisbane.

Total dwelling commitments will grow by 23% in Queensland during 2011-12, or by 32,650, followed by 21% growth in New South Wales, 14% growth in Western Australia and 11% growth in the Northern Territory.

South Australia will record only 2% growth, while other states aren’t so lucky. Tasmania will see a 10% decline, with Victorian starts also falling by 7% to 55,350. The Australian Capital Territory will see the biggest decline, falling 33% to only 3,250 – although BIS says this is because current construction levels are exceeding demand.

Queensland is the key area of growth, Zigomanis says, with resources and reconstruction efforts to provide the industry with a boost.

“We think the last year has been pretty weak for the resource states, especially in the Queensland market where the economy has been hit on multiple fronts. The tourism sector has been hit hard by the Australian dollar, and non-residential construction has also been weak.”

“Our forecast for economic growth is that this market will improve, especially as a number of coal and gas projects get environmental approval and will be ramping up throughout the next year.”

Western Australia is also pinned as a strong growth state, with resources projects boosting demand.

“Substantial investment in new mining capacity is being announced, starting with the Gorgon project that has already commenced,” BIS says.

“All of the growth in 2011/12 will come from New South Wales, Queensland, Western Australia and Northern Territory, where activity has been below previous peak levels and a larger dwelling deficiency exists, hence creating room for a stronger recovery.”

The only problem is interest rates. While cash rates are currently steady, and another interest rate rise isn’t expected for some time, economists are all but unanimous in their belief the next movement for the Reserve Bank is upwards.

However, Zigomanis says those rate rises will be spread out over a long period of time, providing more confidence in the construction market.

“I think economic growth will be able to offset some of the early interest rate rises. Once you start getting into the high eight or nine percentage marks, that’s when you see growth constrained.”

“But I think our market can sustain that, as we’re not expecting to see the second rate rises until the second half of the year.”

However, interest rates will eventually constrain the market, the report argues, saying income and employment growth will lead to a peak in variable rates at 9.5% in the second half of 2013, which will “ultimately impact on affordability and slow demand”.