If you walk around inner Sydney or Melbourne, it’s hard to miss the record-breaking apartment construction boom transforming the skyline.
But get this: the frantic building activity, much of it driven by high-rise units, is predicted to soon start cooling off.
If these predictions are correct, that will be a significant change for the economy, after a boom in housing construction over the last five years, fuelled by cheap debt and rising house prices.
So, will the housing construction boom be followed by a bust, as is often the case in this industry? And what impact would a downturn be for the economy, and the housing market?
Housing construction is always a big part of the economy, as it makes up 5 to 6 per cent of gross domestic product and tends to move in cycles (booms and busts).
But in recent years, this industry has been particularly significant, because it helped fill the gaping hole left by a plunge in mining investment.
Economists at both CBA and UBS expect residential construction will slow over the coming years. Photo: Dominic Lorrimer
UBS economist Scott Haslem estimates that at the peak, the country was building a record 250,000 new homes a year, and a key reason for this was a surge in high-rise apartments.
Whatever your thoughts on the impact of all these new units on our big cities, the narrow economic effects of the building boom have been positive.
Commonwealth Bank economist Kristina Clifton says that in the past five years, employment in residential construction has jumped 38 per cent, several times faster than the 6.4 per cent growth in total employment.
The impacts go far beyond jobs for tradies. Building new homes also requires materials, many of which are manufactured domestically. Once the homes are built, their new occupants tend to go shopping for big-ticket items like whitegoods and furniture, benefiting the retail sector, another very large employer.
And let’s not forget the taxman – another big winner from housing booms. Stamp duty in NSW has more than doubled in the last six years, making up almost a third of the state budget, CBA reports.
Inevitably though, these trends will go into reverse when things cool down. It is likely we’re getting close to that point now, as prices cool and banks tighten their lending.
UBS’ Haslem forecast in a recent report that there would be 175,000 units built next year, down from about 200,000 this year. He says it won’t be a “crash” in building activity, because there is still strong demand for homes, but he does predict a “correction”.
“One would anticipate that we will get a meaningful correction in the next couple of years in the number of cranes that you will see on the horizon.”
Haslem estimates the downturn could shave about 0.5 of a percentage point off the economic growth rate, and believes it will occur alongside house prices flatlining in 2018.
“If there’s less building activity and less credit growth, then it’s likely that we’ll see some moderation in house price growth.”
The Reserve Bank is more up-beat, saying activity will stay flat for the next year, and then decline slowly. But it has repeatedly highlighted another consequence of all this building: very slow rises in rents, as many more new homes start to come onto the market. Landlords should keep that in mind when thinking about rent increases.
CBA’s Clifton also expects a slowdown in home-building, but says the disruption for construction jobs should be “minimal,” thanks to stronger growth in non-residential building, and government spending on infrastructure.
Another favourite Australian past-time that is closely linked to the property market – renovating – may also cushion the impact of a construction downturn.
The share of housing investment going towards home renovations is also unusually low, especially for a time in which house prices have been rising strongly, and CBA says renovation spending could “catch up” in the next few years.
The bottom line is that housing construction is likely to soon slow down, but there are good reasons to believe it will avoid a full-blown crash.