The housing construction industry in Western Australia hit decade-low activity levels last financial year, yet there is uncertainty about whether the traditional bounce will occur.
Dwelling starts in WA have gone from 25,092 in 2009-10 – the third-highest level in 40 years – to just 17,548 in 2011-12, according to data released earlier this month by the Australian Bureau of Statistics.
That was the lowest level in more than a decade and was substantially lower than all forecasters had anticipated.
Despite the sharper-than-expected fall, opinion is divided on the short-term outlook. More significantly, long-term demographic trends around household formation mean the building industry may never return to ‘normal’.
The Australian Construction Industry Forum has forecast that total spending on residential construction in WA will rise by just 2 per cent to $10.2 billion in the current financial year.
The forum, which will release its detailed WA forecasts in Perth next month, expects “reasonable” growth from 2013-14 onwards.
It forecasts total spending will increase to $14.5 billion in 2014-15 and $16.9 billion in the following year.
The Housing Industry Association’s Economics Group expects the recovery will happen sooner. It has forecast dwelling starts to jump by 25 per cent to 21,920 in the current financial year and then by a modest 5 per cent to 23,020 next financial year.
The Housing Industry Forecasting Group, which includes all major industry associations among its members, is crunching the numbers for its next set of forecasts.
Its most recent forecasts, released last year, show the hazards of this practice. The HIFG had expected dwelling starts to total 18,500 last financial year; the much lower outcome reflected several factors, including the new Building Act, which has distorted building approvals.
For 2012-13, it was forecasting dwelling starts to be in a very wide range, from 21,000 to 22,000. The HIFG said forecasting was always difficult but in recent years had been more difficult than usual.
The positives for the state include population growth, income growth, low unemployment and falling interest rates.
The downside risks have included another global credit crunch, low consumer confidence and households being averse to taking on debt.
The low volume of dwelling starts makes life challenging for all building companies operating in WA.
That helps to explain why many have pursued opportunities in the state’s north and diversified into the manufacture of transportable accommodation for mining camps.
Peter Stannard Homes chief executive Trent Bartlett said some of the builders that had expanded into the regions had since contracted or closed offices.
That leaves the metropolitan market intensely competitive, with pressure on profit margins.
“Whilst we would normally make healthy margins in a normal trend cycle for the industry, everyone’s chasing each other to the bottom in the first-home buyer market and margins are being severely hit at the moment,” Mr Bartlett said.
“It’s a numbers game, there’s still a lot of people building homes in Western Australia. Volume is critical for these bigger building companies.”
m3 Property managing director WA Gavin Chapman believes the downturn in dwelling starts partly reflected changing preferences of buyers.
“If you look from 2010 to 2012, WA owner-occupier housing finance was up and in the same period building approvals and dwelling commencements were down,” Mr Chapman said.
“Now, that tells you people are buying established homes, either because of their location or they represent better value.”
Mr Bartlett said another trend was the growing interest in apartments, because of affordability pressures. “When you think about the concept of the first-home builder, I think the first home is more likely to be a unit or apartment,” he said.
Across the industry as a whole, multi-residential approvals (apartments) have accounted for 20 per cent of total dwelling approvals over the past 20 years.
In the past two years, apartments have fallen below that level, to 18 per cent last financial year.
Another significant trend is the rate of household formation; if this changes, the underlying demand for dwellings in WA will also change.
Based on the traditional rate of household formation in WA, underlying demand has been considered to be about 27,000 dwellings per year.
However, that number is out of date, according to REIWA research and policy manager Stewart Darby, who said the long-term decline in the number of people per household had reversed in recent years.
He said the latest census data discredited claims of wholesale housing shortages, and estimated underlying demand was actually about 22,000 dwellings per year.
