Housing market at start of recovery but Melbourne, Adelaide to stay weaker for longer: BIS Shrapnel

The housing industry is at the beginning of a recovery that will see new lot production increase in Queensland, Perth and Sydney over the next year, a new report from BIS Shrapnel has predicted, boosted by a more positive outlook for interest rates.

The prediction will bring some hope for the market, which is continuing to suffer as fewer buyers result in lower prices and auction clearance rates.

Only 53% of auctioned homes were sold this weekend in Melbourne, according to the REIV, while Sydney recorded a clearance rate of 55.3%, along with Adelaide and Brisbane which both recorded 36%.

But while the BIS Outlook for Residential Land, 2011 to 2016 report expects these markets to begin recovering from being undersupplied, the forecaster predicts lot production in Melbourne and Adelaide will continue to weaken.

“We expect 2011-12 to be a little better than last year, and then take off towards 2013-14,” says report author and senior project manager Angie Zigomanis, who says the expiry of the first home owners grant and interest rate rises during 2009-10 kept building down in some cities.

“Now, you have a better interest rate outlook. Most people thought the next move would be up, and now it’s straightened out a little bit more.”

That positive outlook has flowed through to individual cities, where BIS found that over the next five years, most cities will experience a boost in production.

During 2010-11, the report stated that all capital city and south east Queensland markets except Sydney and Perth recorded a decline in lot production, keeping markets ripe for a recovery.

“After record lot production in Melbourne and new record levels in Adelaide in 2009/10, any pent up demand pressures have now well and truly eased, and activity is slowing.”

“Lot production in the south-east Queensland markets of Brisbane, the Gold Coast and Sunshine Coast has collapsed to long-term lows, reflecting the underlying oversupply of dwellings across the region.”

Zigomanis says the “pull through” effect of the first home owners grant has now expired, allowing the market to slowly improve over 2012 – although a boost in economic activity and higher interest rates will cap growth in 2014-15 and lead to a downturn.

Housing Industry Association economist Andrew Harvey says recent trends in housing production have made conditions ripe for a recovery, but says it may take a little longer to see any permanent benefit.

“We hold out optimism for New South Wales because of the change in Government, and releasing some land here and there,” he says.

“With Melbourne, we’d definitely agree. We’ve come off some record highs there, and it’s likely that we’re going to be seeing much slower growth there.”

Sydney

Lot production fell to a low of 1,500 in 2008-09, although production has picked up to 3,000 over the two years to 2010-11. A reduction in state government levies should help production, with a “significant deficiency” expected to boost building.

Lot production is set to reach 6,100 lots by 2013-14.

Perth

Production in Perth peaked in 2005-06 at 12,300, but has now since fallen to “well below” this level – only 6,000 in 2008-10.

Land affordability is improving, and with an improved interest rate outlook, lot production should be given a boost. Production is set to reach 11,800 lots and remain there through 2013-14 as incomes rise.

Brisbane

Home construction has suffered in Brisbane, with the market suffering from oversupply, weak economic conditions and higher prices. BIS says the market will lag through 2011-12, but that weakness will lead to a deficiency emerging.

Production is set to rise to a peak of just 6,800 lots in 2013-14 – well below the peaks of the mid 1990s and early 2000s.

Gold Coast

A peak of 3,600 lots was recorded in 2006-07, but only less than 1,000 were produced in 2010-11. BIS expects minimal activity over the next year, but production will rise to a peak of 2,200 in 2013-14.

“While recent price declines on the Gold Coast have seen affordability improve, it remains an issue and a forecast peak in interest rates in 2014 will cut off any upturn before it can fully play out.”

Sunshine Coast

Production fell to just 1,600 lots in 2010-11, well below the high of 3,700 in 2003-04. Reduced interstate migration, local economic conditions and problems with funding have all led to the decline.

Growth will be minimal over the next year, with a moderate upturn expected in 2012-13 as population growth increases.

Melbourne

Lot production in Melbourne reached a record 18,900 in 2009-10, beating the previous year at 18,700, with much of the new housing demand coming from increased net overseas migration.

“However, demand for new houses and land in Melbourne is now in decline, with around 17,700 lots estimated to have been produced in 2010/11,” Zigomanis said.

“Pent up demand from the record level of population growth is being satiated, while strong rises in land prices is resulting in some purchasers seeking more affordable established stock.”

Lot production is set to fall, to around 16,000 in 2012-13, although a peak in interest rates in 2014 will lead to a stronger downturn of just 13,000-15,000 per year over the next three years.

Adelaide

Residential construction activity has improved, leading to an increase from 3,000 in 2004-05 to nearly 4,000 per year over 2008-09 and 2009-10. Migration was part of that, but that has also led to an excess of dwellings – combined with the tough economy, lot production has fallen to just 2,500 lots.

The better outlook for interest rates will only be able to keep lot production constant at 2,500 per year, through to 2013-14, and BIS says that level of activity translates to new supply running at slightly below the estimated level of demand.

“The subdued environment over the next few years is also expected to result in only minimal increases in land prices.”