By Jill Fraser
Residential building began to lose momentum through 2010, dampened by rising interest rates and the expiry of the First Home Owner’s Grant Boost Scheme. Will residential building hold up through 2011 and will first-home buyer demand recover in the short-term?
At BIS Shrapnel’s March Business Forecasting Conference in Melbourne this week the consensus was that residential construction will regain momentum in 2011/2012.
Together with various State Government incentives for new dwellings, the First Home Owner’s Grant Boost Scheme helped drive a national rise in private house commencements of 20 per cent in 2009/10.
These incentives however only served to pull existing demand forward, with first home buyers who would have otherwise been in the market in 2010 entering the market in 2009 to take advantage of the increased incentives before they expired. Consequently there has been a significant drop off in first home buyers through 2010. Loans to first home buyers fell from 191,000 in 2009, to 96,200 in 2010.
The weaker first home buyer demand also flowed through to up-grader demand for new houses. With first-home buyer demand well down, up-grader demand for new dwellings also fell as fewer potential buyers were in the market for their existing properties. As a result, new housing starts are on track to record a decline in 2010/11.
This is being more than offset by a rise in private sector other dwelling commencements stemming from improved investor sentiment and demand, with other dwelling starts forecast to maintain growth in 2011.
It appears that the drop off of first-home buyers has now bottomed out. Data for the month of December 2010 indicates that the number of first-home buyers improved to a decline of 29 per cent on the previous year, while the actual number of loans given to first-home buyers was also the highest level since December 2009. Loans to first home buyers are expected to be getting back to normal levels of 10,000 to 11,000 per month by the end of the year, equating to 120,000 to 130,000 per annum—around the average of the last 5–6 years.
The rise in first home buyer demand is expected to result in increased turnover across the board, as up-graders will have a stronger market to sell their existing dwelling into. Many of these will trade up to a new dwelling, facilitating growth in new house commencements in 2011/12. The higher turnover should also see stronger price growth come through, although this will be dampened by strains on affordability as interest rates continue to rise.
After a 0.4 per cent rise in variable rates in December 2010 we do not anticipate any further rises in interest rates in the first half of 2011. However, two rises totalling 0.5 percentage points are forecast in the latter half of the year, as the Reserve Bank takes pre-emptive action on rates. A further two rises are expected to be interspersed through 2012.
We anticipate the Reserve Bank will push through more aggressive rate rises in 2013 as skills shortages become more acute and inflationary pressures intensify. A forecast peak in variable rates of 9.5 per cent in the second half of 2013 will ultimately impact on affordability and slow demand.
A key driver behind the rise in construction will be the substantial dwelling deficiency that exists nationally and is present across most of the states. Although we are forecasting net overseas migration to decline underlying demand will still remain high, easing from an estimated 186,700 dwellings per annum over 2006/07 to 2009/10, to 179,600 dwellings per annum over the five years to 2014/15. This remains well above our estimate of 161,000 new dwellings being commenced in 2010/11.
There has been concern that interest rates are currently already too high and will prevent any further growth in new dwelling activity, with many putting the decline in first home buyer demand in 2010 down to the rise in interest rates over 2009/10. While this will have had some impact on sentiment, we estimate that first home buyer loans in 2009 were up by around 60,000 from normal levels due to purchases brought forward to take advantage of the grant. Consequently, the inevitable drop off in 2010 was also going to be substantial despite the rise in interest rates.
Moreover, rising first home buyer demand is not inconsistent with rising interest rates. This was evident in 2006/07 and 2007/08, when loans to first home buyers were 130,000 per annum, while variable interest rates increased from 7.6 per cent at June 2006 to a peak of 9.6 per cent at June 2008. Although prices are now higher, our view is that affordability issues won’t be a significant constraint on new construction until variable rates pass the 8.5 per cent mark—which we forecast towards the end of 2012.