Australia / Analyst Insights
Where to for Construction and Property Prices?

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by IBISWorld
May 28 2020

Construction activity and housing prices in Australia are determined by population growth, interest rates, household incomes and the rate of dwelling commencements. The COVID-19 outbreak in February 2020 has had a significant impact on all of these factors. COVID-19 is expected to have a major impact on the Construction division through to 2020-21, and continue to reverberate through the economy until 2023-24.

The outlook for housing prices is critical to the performance of the economy as a whole. According to the Australian Taxation Office, over two million Australians own investment properties. Close to two-thirds of property speculators have an annual income of less than $80,000.

Short term impacts for construction

Operators in the Construction division have been required to change worksite practices to comply with social distancing regulations. To limit the spread of COVID-19, firms have limited the number of workers operating within confined spaces and introduced new measures regarding cleanliness and the use of personal protective equipment. Construction managers have had to limit the number of workers on a construction site, and stagger meal breaks where possible. Changes in work practices are likely to delay the overall construction process and add to project costs. For example, the use of hoist lifts on high-rise construction projects must be coordinated as fewer people can be carried in each journey.  

COVID-19 is also expected to disrupt the Construction division through upstream supply chain faults. Local construction activity is heavily reliant on imported materials and components. A downturn in housing construction is expected to have a significant effect on the economy, given the links the industry has with other sectors. For example, the Construction division has ties to business service industries through architects, draftspeople and construction engineers, and to the Manufacturing division through steel, bricks and other building supplies. Residential construction accounts for around 2% of total employment. When also considering related employment in manufacturing and other service industries, approximately 5.8% of employment is closely related to the residential construction sector. The Construction division is expected to decline by 5.1% in 2019-20, to $414.1 billion. This trend is expected to be followed by a decline of 4.0% in 2020-21.

Dwelling commencements are expected to decrease by 16.6% in 2019-20, to 163,900. Almost all international travel will likely be postponed until at least January 2021, reducing immigration and slowing population growth. This trend is expected to undercut demand for new housing. A fall in the number of international students in Australia and a rise in unemployment are also anticipated to weigh on dwelling commencements. A weak overall economy is projected to weigh on investor confidence and reduce investment in new housing. Dwelling commencements are forecast to fall by a further 13.8% in 2020-21. The Federal Government is currently working on a multibillion-dollar scheme to support housing construction as part of its strategy to stimulate the economy. Details of this scheme are not yet available.

Short-term impacts for property prices

The outlook for property prices is currently at its lowest point since the Global Financial Crisis of 2008-09. Property prices were already weak in 2018-19, due to APRA tightening lending standards in 2017-18 and imposing restrictions on new interest-only and high loan-to-value ratio lending. In addition, foreign investment in Australian property has steadily declined from $72.4 billion in 2015-16 to $14.8 billion in 2018-19, reflecting increased restrictions on capital transfers in home countries, particularly China. A combination of factors are projected to exert further downward pressure on property prices over the first half of 2020-21.

A global deterioration in economic conditions is expected to dissuade foreign investors from investing in Australian markets, particularly as economic uncertainty remains high. In addition, the potential income from Australian housing speculation is expected to be lower until 2021-22. International students have withdrawn their applications for accommodation, as they remain in their home countries and complete studies online. Rental yields are expected to fall significantly for properties that were primarily used for travellers, such as international students accommodation near universities and AirBnB listings near tourism regions.

Currently, the JobKeeper and JobSeeker support schemes introduced by the Federal Government are providing indirect support to landlords, by assisting tenants to meet rent obligations. As at May 2020, 2.9 million employees had received JobKeeper payments. These support schemes are expected to be wound back by September 2020. Following this point, an increasing number of tenants will likely struggle to meet rent obligations as unemployment rates remain high, depriving landlords of cash flow and potentially incentivising some to sell. Property speculators that entered the market over the two years through 2017-18, when prices were highest, are most at risk of falling into negative equity. This occurs when the value of their property is less than the amount owed on its mortgage.

The degree to which property prices will fall is difficult to forecast, especially as pricing dynamics are typically different between metropolitan and rural areas, different between apartments and houses, and different between the west and east coasts. Houses near high value locations such as Sydney and Melbourne are unlikely to experience prolonged declines.

Long-term impact on construction

The Construction division is forecast to grow at an annualised 1.0% over the five years through 2024-25, to $434.7 billion. Federal and state governments are expected to support an economic recovery by providing stimulus to construction projects, particularly new infrastructure developments. The Heavy and Civil Engineering Construction subdivision is projected to grow at an annualised 2.0% over the five years through 2024-25, and the Construction Services subdivision is anticipated to increase at an annualised 1.9% over the same period.

Conversely, the Building Construction subdivision is forecast to trend down at an annualised 0.5% over the next five years. Investment in housing construction will likely be scaled back in response to the economic uncertainty following the COVID-19 pandemic. The anticipated deterioration in the pace of economic growth is likely to diminish the capacity of local investors to fund new building projects, while greater global financial instability is projected to limit the flow of foreign investment into the local property market. The House Construction industry is forecast to decline by 22.4% in 2020-21, before returning to growth in 2022-23.

Long-term impact on prices

Residential housing loan rates are forecast to fall to an average of 4.74% in 2019-20, and 4.44% in 2020-21. The cash rate is a major factor in determining variable home loan interest rates, as it represents funding costs for banks. Low interest rates are anticipated to support housing prices in 2020-21 by increasing access to debt for prospective buyers. However, future support for property prices from the RBA is unlikely. No further significant declines in residential housing loan rates are expected after 2020-21 as the cash rate has reached its effective lower bound of 0.25%. The RBA is not expected to implement a negative cash rate in Australia, following the weak results of similar policies in Japan and Europe. The RBA is expected to gradually raise the cash rate over the next five years, to 1.43% in 2024-25.

The behaviour of Australian investors may permanently shift if property prices were to undergo a prolonged contraction. A downturn in prices may undermine the belief that property speculation is low-risk, and lead investors to distribute wealth into other asset classes, such as equities. The outlook for property prices remains uncertain due to potential policy changes, particularly revisions to negative gearing tax arrangements.

IBISWorld reports used to develop this release:

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Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
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Email: mediarelations@ibisworld.com