Recent developments

Population growth in Victoria remains strong, as does the level of employment.  While the cost of housing in Australian capital cities continues to rise, especially in Sydney and Melbourne, the affordability of housing has improved.

Data from Westpac indicate that consumer confidence fell by 5.6 per cent in September; however, the recent change in government leadership may improve confidence in the near term.

The Australian Bureau of Statistics estimates that total building and construction activity in Victoria fell by 2 per cent in the June quarter.  While down from the strong March quarter result, activity was still 6 per cent higher than a year ago.

Activity fell in all three segments of the industry: housing by only 0.2 per cent, non-residential building and engineering construction by around 4 per cent.

The total number of dwellings approved in Victoria eased slightly in August.  Approvals of detached houses increased by 8 per cent to 2,902 but multi-unit approvals fell sharply to 2,364.

Population

Although slowing, population growth remains strong in Victoria.

In the year to March 2015, Victoria’s population increased by 97,500: 8 per cent less than the increase in the previous year to March.  Despite the slowdown, the increase of 1.7 per cent was much faster than national growth of 1.4 per cent and faster than growth in any other state or territory.

Employment

The state of the labour market also affects housing demand.

Over the past three years the number of people employed in Victoria has risen relatively rapidly: by 3.8 per cent compared with a national increase of 3.2 per cent.

However, over the same period the number of people in full-time employment, a useful indicator of the number of potential home owners, has risen less rapidly: by only 1 per cent in Victoria and 1.1 per cent nationally.

As the chart shows, in the three months to August the average number in full-time employment continued to rise strongly in New South Wales but declined slightly in Victoria and fell more sharply in the other large states.

Housing affordability

The median dwelling price in Australian capital cities increased by 4.7 per cent to $562,000 in the June quarter to be 9.8 per cent higher than a year earlier.  Significant rises were confined to Melbourne, where they increased by 4.2 per cent to $560,500 and were 7.8 per cent higher than a year ago, and Sydney, where they were up 8.9 per cent in the quarter to $772,000 and 18.9 per cent on a year ago.  In all other capitals, the quarterly price changes – up or down – were less than one percent.

The rises tend to encourage investors – a growing force in the market – but to deter owner-occupiers because they make housing less affordable.

Despite higher home prices, the affordability of housing increased in the June quarter: nationally by 1.9 per cent and in all states except New South Wales.  Another cut in interest rates and higher household incomes were the cause.  In Victoria, affordability increased by 2.3 per cent, to be slightly better than a year ago and 3 per cent better than three years ago.

Consumer confidence

Consumer confidence fell sharply in September. Volatile share markets, slow economic growth and fears about employment prompted the fall.  The index of consumer sentiment fell by 5.6 per cent to 93.9.  A reading below 100 indicates that more respondents are pessimistic about the future than are optimistic.

The ‘time to buy a dwelling’ component of the index also fell and was 30 per cent lower than two years ago.

The change in Prime Minister is may cause an uptick in confidence in October.

 Housing activity

Having risen rapidly in the two preceding quarters, new housing activity eased in the June quarter.  Work on multi-units was unchanged at a level that was 24 per cent higher than a year ago.  Work on houses fell by 3 per cent and renovation activity rose by 2.8 per cent.

Work done on new housing is forecast to increase slightly from $15.1 billion in 2014/15 to $15.7 billion this year but to fall by 7 per cent to around $14.6 billion in 2016/17.

Work on housing renovations fell by 4.6 per cent to $7.1 billion in 2014/15: only a bit less than half the value of all work done on new housing.  It is forecast to increase to $7.3 billion this year and to $7.5 billion in 2016/17.

Housing approvals

The trend in dwelling approvals had fallen to 62,700 a year by August after having peaked in the March quarter this year at an unsustainably high annual rate of 73,500.  Given the underlying requirement for new homes this year is around 51,000, it could fall further in the months ahead.

Victorian housing starts are estimated to have risen by 25 per cent in 2014/15, to 64,500.  As a result, there is now an over-supply of housing and starts, even though supported by sales of apartments to investors, are forecast to fall to 58,000 this year and to 55,400 in 2016/17.

Non-residential building

Following a big increase in the March quarter, work done on non-residential building was virtually unchanged in the June quarter to a seasonally-adjusted annual rate of $10.1 billion.

Forward indicators of activity have been weakening and until recently approvals had been trending lower for more than a year.  Early in the September quarter, however, the trend in approvals rose from an annual rate of $7.1 billion in the June quarter to $7.4 billion: the first increase in more than a year.

The latest trend level, however, remains well below the $9.5 billion of work done in 2014/15, suggesting falling activity in the year ahead.

Engineering construction

The volume of work done on engineering construction fell by 4 per cent in the June quarter to a seasonally-adjusted annual rate of $9.8 billion: about 1 per cent less than a year earlier.

The value of work done in 2014/15, in 2012/13 prices, was $9.8 billion: 3.7 per cent less than work done in the previous year.

Forward indicators remain weak and we are forecasting that activity will fall by 6.4 per cent this year to $9.2 billion.

Planning delays seem likely to cause a further decline to $8.9 billion in 2016/17. The chance of securing Commonwealth government funding for rail projects has nevertheless improved, and this could lift activity in 2016/17 above this forecast.

Business confidence

Business confidence picked up to an above-average level in the June quarter but fell again in the first two months of the September quarter.