08 August 2016

Australian property market facing oversupply

The Australian residential building boom will translate into an oversupply of stock within the next 12 months and new home building will soon begin to run out of steam, according to market analyst and economic forecaster, BIS Shrapnel.

According to its Building in Australia 2016-2031 report, national dwelling commencements are estimated to have reached their peak and will begin to decline from this level in the coming year.

"After recording strong growth during the past four years, we estimate that total dwelling starts reached an improbable 220,100 in 2015/16, an all-time high,"

 said Dr Kim Hawtrey, Associate Director at BIS Shrapnel.

"From this level, national activity is forecast to begin trending down over the following three years, with the high-flying apartments sector leading the way down."

While a sizeable dwelling stock deficiency coupled with record low interest rates
drove building activity to its current highs, Dr. Hawtrey argues that almost all major markets will soon shift into oversupply.

"Low interest rates have unlocked significant pent up demand and underpinned the current boom in activity, but with population growth slowing and a strong backlog of dwellings due for completion, new supply will outpace demand," 

said Hawtrey.

"This will see the national deficiency of dwellings gradually eroded and most key markets will begin to display signs of fatigue."

New South Wales is an exception - it will remain undersupplied for some time yet. But even there, BIS Shrapnel expects a slowdown in home building too.

"Sydney is up against an affordability ceiling as well as constraints on site availability. Investor demand is cooling, and the city will see a surge in new supply coming on stream over the next 1-2 years," 

he said.

Based on BIS Shrapnel's assumptions about household formation per thousand head of population, the Building in Australia report estimates the national dwelling stock deficiency reached a peak of around 117,000 dwellings by June 2014.

After a strong boost to home construction this efficiency has roughly halved to approximately 58,000 in June 2016.