Jun 09 2020
The closure of Australia’s borders, along with social distancing restrictions aimed at reducing the spread of COVID-19, have led to a sharp downturn in consumer sentiment, business confidence and business activity in 2019-20. The Construction division will likely be a major casualty of the COVID-19 pandemic. Dwelling commencements are expected to decrease by 16.6% in 2019-20. Construction activity is expected to decline by 5.1% in 2019-20, to $414.1 billion. This trend is expected to be followed by a further decline of 4.0% in 2020-21.
Approximately 5.8% of total employment across Australia is closely related to the residential construction sector, which is a major source of demand for the Architectural Services and Engineering Consulting industries, and various industries in the Manufacturing division.
In an effort to support Australia’s ailing Housing Construction industry, the Federal Government announced its $668 million Homebuilder stimulus package last week. This package provides support to eligible Australians seeking to build a new home, or complete substantial renovations to existing properties.
‘Under the HomeBuilder scheme, eligible Australians will be able to access a $25,000 grant towards building or renovating their home,’ said Senior Industry Analyst, James Caldwell.
Unfortunately, this scheme has a limited capacity to support the Housing Construction industry. The scheme is expected to attract 27,000 applicants over its lifetime, representing a fraction of the 7.7 million dwellings in Australia. Additionally, construction of new homes must begin within three months of signing the contract. This is a relatively short time frame for many house and land packages in Australia, as decisions regarding home layouts, colour choices and other specifics often delay projects.
‘To be eligible for the grant to undertake renovations, Australians must spend a minimum of $150,000. This is significantly higher than the average cost of common household renovations,’ said Mr Caldwell.
According to the Housing Industry Association, the average cost of a bathroom renovation was $19,553 in 2018-19, while the average cost of a kitchen renovation was $26,280. Consequently, the scheme is likely to be unaffordable for the vast majority of Australians.
Property price decline
‘Despite strong growth in demand for housing over the past decade, the outlook for property prices is currently at its lowest point since the global financial crisis,’ said Mr Caldwell.
Property prices weakened in 2018-19, largely due to APRA tightening lending standards in 2017-18, and imposing restrictions on new interest-only and high loan-to-value ratio lending. Residential housing loan rates are anticipated to fall to an average of 4.74% in 2019-20, and 4.44% in 2020-21. 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 foreign countries, particularly China.
‘Property prices are expected to weaken further in the current year, largely due to deteriorating global and domestic economic conditions caused by the COVID-19 outbreak,’ said Mr Caldwell.
The COVID-19 outbreak in early 2020 has forced the Australian Government to mandate the closure of the country’s borders, which are unlikely to reopen before the end of 2020. This closure is expected to result in a significant decline in net migration in the current year, slowing growth in Australia’s population. Additionally, international student enrolments are expected to decline sharply, reducing demand for rental accommodation and rental yields.
‘Growth in the national unemployment rate and declining household incomes are expected to reduce the ability of Australians to meet mortgage and rental payments,’ said Mr Caldwell.
This factor is expected to increase property listings and cause rental yields to decline, negatively affecting operators in the Real Estate Services industry. Consequently, dwelling commencements are forecast to fall sharply in the current year, due to reduced mortgage affordability and declining demand from investors.
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 economic recovery by providing stimulus for construction projects, particularly new infrastructure developments.
‘Investment in housing construction will likely be scaled back in response to economic uncertainty following the COVID-19 pandemic. The pace of economic growth is anticipated to deteriorate, diminishing local investors’ capacity to fund new building projects,’ said Mr Caldwell.
Greater global financial instability is projected to limit foreign investment in 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.
IBISWorld reports used to develop this release:
- Housing Construction in Australia
- Architectural Services in Australia
- Engineering Consulting in Australia
- Real Estate Services industry
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647