The national downturn in dwelling commencements is now expected to extend into 2006/07 as the weakness in the eastern states extends to South Australia and Western Australia, according to leading economic and industry forecaster BIS Shrapnel.
BIS Shrapnel forecasts commencements to fall 6% in 2005/06 to 147,000 dwellings, and edge down a further 3% in 2006/07 to 142,250 dwellings across Australia.
In the latest edition of its monthly bulletin Building Industry Prospects, BIS Shrapnel states the national pattern of commencements will mask different trends at the state level.
BIS Shrapnel senior project Manager, Jason Anderson explains the national decline forecast for 2006/07 will also be driven by a downturn in South Australia and Western Australia, where commencement activity has exceeded underlying demand and subsequently must come back toward balance.
“Conversely, New South Wales and Queensland commencement levels have failed to meet underlying demand due to land constraints and affordability barriers — issues which will not be resolved during the next two years,” he added.
Sydney is currently experiencing its fourth consecutive year of declines in dwelling construction, which began in 2002/03.
BIS Shrapnel estimates underlying demand for the Sydney market to be 28,000 dwellings, and expects approvals will shrink to 18,000 dwellings in 2005/06, down from approximately 21,000 in 2004/05. BIS Shrapnel forecasts the overall Sydney residential vacancy rate to fall in 2006 and 2007, most likely moving below 1% towards the end of 2007. With only a gradual recovery in construction likely in 2006/07, supply is set to be below demand until 2008/09.
“The extreme undersupply in the Sydney market will trigger a substantial and extended adjustment to residential rentals,” Anderson said.
“As completions of new dwellings diminish sharply during 2006 and 2007, tighter supply will generate strong growth in residential rents, which will gradually improve rental yields during 2006 and 2007.
“A very large increase in rents is required to improve yields on residential property in order to draw investors back into the market and push up the number of new dwellings back towards underlying demand. We expect average rentals to rise by five% during 2006, and then accelerate to at least 10% growth per annum over the course of 2007 and 2008.
“The cumulative increase in average rents in Sydney could be as high as 40% over the five years from 2006 to 2010. This rate of growth would far exceed the cumulative 10% increase in average Sydney rentals over the five years from 2001 to 2005.”
Anderson expects a gradual improvement in affordability and a pickup in residential property turnover moving forward which will encourage house starts in New South Wales, though an expected increase in interest rates in 2006/07 will impact this recovery.
By Nelson Yap
