11
Aug 2016

Home Building to Plunge 50 Percent - BIS Shrapnel

Home Building to Plunge 50 Percent - BIS Shrapnel

Written by Specific Property Specialist  and Guest Writer Terry Taylor


The correction in supply we have to have

All markets and products are affected and determined by supply and demand criteria, “Economics 101”. The residential property market is no different to any market anywhere and whilst we will see all markets ebb and flow, if the fundamentals of a particular market are sound then the trajectory of that market will inevitably move in an upward trend over time. More about that at the end of this article.

One of Australia’s most respected economic forecasters, BIS Shrapnel, is predicting that home building in Australia could fall by 50 percent over the next two years. Now wherever you are in Australia, and in particular if that is in one of our larger capital cities, you will know that what BIS Shrapnel is not talking about is relatively inner city houses on reasonable size blocks of land.

Most of that land in those locations is already built on and is either staying the way it is for the time being at least, or the houses on those blocks are being renovated and quite regularly now, those houses are being pulled down to build a brand new home.

Note when this happens this is not a net increase in supply to the property market. It just reflects the trend to live closer to the centres of our cities. Land in these locations is increasingly being seen as more desirable and it is becoming much more expensive because, as they say, they aren’t making any more of it, and of course they can’t.

What they can do and in fact what they are doing is to increase the density of residential property closer to the areas people actually want to live in. The cost of an individual block of land in these inner city locations is becoming increasingly prohibitive for many, if not most people. This is following a pattern that we can clearly see is a worldwide trend. Just try to buy a house on an individual block of land in central London or New York, or Sydney or Melbourne or Brisbane or, wherever there is a large population and you will see that the prices in those locations are already very high and will continue to rise as the population grows.

So what are BIS Shrapnel talking about and where is this projected building plunge going to occur? Dwelling stats in Australia in the 2015-16 year reached an all-time high of 220,100. Of this total number of properties almost half were apartments (units) and it is this segment of the market that is projected to fall over the next two years by about fifty percent.  That is, according to BIS Shrapnel, a fall from about 107,000 apartments to just under 54,000 over the next two years.  The question is should we be concerned about this and what are the consequences of a reduction in the volume of new residential dwellings?

The answer to this question is that just like Paul Keating’s statement many years ago “This is the recession we have to have” well then “this is the correction in supply we have to have.” Now whenever there is an oversupply of any product in any market then there has to be a correction. This can particularly be the case when much of that oversupply is inappropriate for the demand side of the market. 

As discussed above residential demand is increasing for properties close to our inner cities where the amenities buyers want already exist. Better transport options and shorter travel times, more cafe’s and shops and cultural facilities etc. More people are choosing to live closer to our city centres than to move out to our city fringes where affordable houses on individual blocks of land still exist.

Once again, as I often comment, it is my belief that there is always too much of the wrong kind of property and never enough of the right type of property.  Regardless of the state of the residential market in Australia there really has been an overbuilding of high-rise unit blocks in the centre or close to the centre of our major cities. Many of these buildings have not been designed for permanent or long term residential occupation. The fact is that many of these properties have been built to fit an attractive price point for buyers. In addition most residents would never contemplate making one of these properties their permanent home and hence my comment “always too much of the wrong kind of property”.

So what happens next and what are the implications for property buyers regardless of whether they are owner occupiers or investors? The supply glut that BIS Shrapnel, the RBA and many economic commentators are talking about is the precursor to future property price growth and we had to get to this point before we could move forward and get to the next upward price cycle. The surplus stock of property will eventually be soaked up as population growth continues unabated in Australia. Every available property will be sold and occupied.

In the meantime new and appropriate smaller projects are still coming to the market and this segment of the market, just as is the case with the individual housing market, is definitely not oversupplied. This means that there is an opportunity for good buying in selective new smaller developments that have been designed with larger floor plans that really will accommodate the trend for permanent living and in something other than a house on an individual block of land close to the centre of our cities.

Building costs have been rising steadily and this means new developments where people want to live in the future are going to cost more. The overbuilding of inappropriate property is and will continue to have an effect on the whole property market until the oversupply has been absorbed. This means that smaller quality developers are having to moderate the prices they can sell their properties for and to counter the general oversupply.

If you are buying a residential property for the right reason and you have a medium to long term strategy to hold the property then when the market regains confidence again I can assure you from my many years of experience that you will have to pay considerably more for the properties you buy. You will also have less choice and you will need to make decisions much more quickly than is the case right now to secure the best properties.


Hudson Recommended Properties

We have some stellar properties available that would make an excellent investment or future home. Hudson carefully analyse all properties before we recommended them to our members so you can be assured if it is on our website we have looked at the plans, visited the site, crunched the numbers and are happy to recommend them. Here are just a few that we currently have on offer:

Give you Adviser a call today if you would like to know more about any of these properties. 

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