Is a potential construction slump putting the Prebuilt house market at risk?

Is a potential construction slump putting the prebuilt house market at risk?

Australian construction industry analysis experts Macromonitor are predicting that a significant slump is imminent in both the Melbourne and Sydney markets. Ever since the Australian mining downturn began to show effects on the industry, Sydney and Melbourne have managed to hold out in terms of residential construction projects, however Nicholas Fearnley, one of Macromonitor’s analysts, believes we are already at the peak of the upturn in these cities, and that they will soon be joining the rest of the country’s trend downwards in terms of new projects.

Why Have Melbourne and Sydney Resisted the Construction Downturn So Far?

The downturn in mining reliant areas of Australia began in 2014, with Queensland and Western Australia the first to see noticeable declines. However, as people flooded back to the South East in response to the collapse in the mining industry, Sydney and Melbourne both saw increasing demand for property. This, combined with a dramatic increase in foreign investment into domestic property construction, a preceding period of low interest rates, and under-construction in these areas during the mining boom, was a recipe for Melbourne and Sydney to see an impressive construction upturn.

The National Downward Trend in Residential Construction

At this point in time, however, Macromonitor believe that on a national level, we are in a decline in construction that will see a 23 percent decrease by the trough of the curve in 2019, from the peak levels observed last year. While Sydney and Melbourne are both still close to the peak levels of new construction for dwellings, Macromonitor propose that oversupply of apartments is about to become an issue, as is credit tightening. While they project the low point in the trend to hit in around 2019, Macromonitor’s analysis doesn’t anticipate any real upward movement until somewhat later – 2022 in Victoria, for example.

Other Factors Contributing Toward the Projected Decline in Property Construction

While a drop off in foreign investment and expected tightening in lending criteria from mortgage providers are likely to come as a result of the supply glut in housing caused by the extremely high levels of construction activity we’ve seen in Melbourne lately are key factors, other economic matters are also set to exacerbate things. For one thing, the weak Australian dollar is causing imported materials to cost more than before, and the price of some key construction commodities have also been rising on the markets – you need only take a look at an iron ore price chart to see how costs are rising in the building sector. Interest rates are also expected to be put up in early 2018, and this is expected to be the first in a series of rate increases. With pressures in terms of cost and no real need for more new properties, a decline in residential building does indeed seem inevitable at this point.

Consequences of a Drop in Housing Construction

If things do follow the same kind of trajectory Macromonitor have suggested, it is likely this will also come hand in hand with a drop in engineering construction. It is estimated that we may see around 166,000 jobs in construction related sectors lost by 2020.

Macromonitor’s research does suggest some dark times ahead in the house building industry and wider construction market in Australia in the coming years, however, all downward trends do have a trough and begin to recover afterwards.

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