In recent months the economic outlook, in the world and especially in Australia, has worsened and, as a result, the outlook for construction has worsened too.

Population growth has been slowing in most states and territories and now seems likely to continue at a slower pace than previously forecast.  The slowdown in Victoria, however, has been quite modest; and over the years to 2020, Victoria’s population is still expected to grow more rapidly than in any other state, providing a solid base for future housing demand.

The prospects for engineering construction in Victoria are relatively good too.  Having enjoyed no mining boom, we avoid the crash that continues to depress activity in the resource-rich states.

Some key recent trends are:

• Employment has been growing relatively strongly in Victoria, which is a positive for housing.
• The recent boom in apartment approvals, especially strong in Victoria, peaked in the March quarter. Approvals have since fallen by 30 per cent and starts and construction activity will follow.   The market for apartments is likely to peak soon, slowing increases in prices and rents.
• Housing is less affordable than it was a year ago, both in Victoria and nationally.
• Consumer confidence fell recently and seems likely to stay low, especially given falling share prices and concerns about China.
• Total building and construction activity in Victoria increased by less than one percent in the September quarter and was lower than in the March quarter. Nonetheless, new housing activity increased by four per cent, and remained steady in non-residential building. Engineering construction activity fell by two per cent.
• The trend in Victorian dwelling approvals peaked in the first quarter of 2015. The sharp decline in multi-unit approvals has pulled the total down, but approvals of houses have been well sustained at a rate of around 35,000 a year

Economic outlook

In its January update of World Economic Outlook, the International Monetary Fund (IMF) lowered its October forecast of world growth in 2016 from 3.6 to 3.4 per cent, and from 3.8 to 3.6 per cent in 2017.

The economic outlook has worsened considerably since our last forecast three months ago:  world economic growth has slowed and the outlook for Australian economic growth, population growth, and building and construction activity has deteriorated.

Bulk commodity prices have fallen below levels reached in the world recession and could go lower still.  This is damaging Australian incomes, government tax receipts and prospects for further mine development.

Growth in the Australian economy in 2014/15 has been revised down by the Australian Bureau of Statistics from 2.4 to 2.2 per cent.  We are now forecasting economic growth of only 2.3 per cent this year and, as apartment construction falls, of 2.2 per cent in 2016/17.

The latest forecasts by the Reserve Bank and in the Federal Treasury’s Midyear Update for 2016/17 now look unreasonably optimistic. The Reserve Bank’s latest forecast (November) is for growth of 2.25 per cent in 2015/16 and 2.5–3.5 per cent in 2016/17.  Treasury’s mid-year update (December) is for 2.5 per cent in 2015/16 and 2.75 per cent in 2016/17.

Population

Although slowing, population growth, a major driver of new housing activity, remains strong in Victoria.

In the year to June 2015, Victoria’s population increased by 99,400: six per cent less than the increase in the previous year to June.  Despite the slowdown, the growth rate 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 in full-time employment has risen by 2.5 per cent in Victoria and by 2.4 per cent nationally.  This is a useful indicator of the number of potential home owners.

As the chart shows, in the three months to November the average number of people in full-time employment continued to rise quite strongly in Victoria, Queensland and nationally, and strongly in New South Wales.  In South Australia and Western Australia, however, full-time employment fell.

Affordability

The affordability of housing fell in the September quarter: by about six per cent in Victoria and New South Wales, where home prices continued to rise strongly, and by about four per cent nationally.  Continued low interest rates and higher household incomes limited the deterioration.

Affordability is six per cent worse in Victoria than a year ago but one per cent better than it was three years ago.

Consumer confidence

The index of consumer confidence fell by 3.5 per cent to 97.3 in January 2016.  A reading below 100 indicates that more respondents are pessimistic about the future than are optimistic. News about problems in the Chinese economy and falling commodity and share prices were likely major causes.

The ‘time to buy a dwelling’ component of the index surprisingly increased sharply to be only 1.4 per cent lower than a year ago.  There was also a big improvement in confidence about the outlook for house prices.  This component was nevertheless still ten per cent lower than a year ago.

This result is unexpected given home prices fell in the December quarter in every capital city except Brisbane and Adelaide, and that the boom in apartment approvals has peaked at a very high level.

We do not see many reasons to expect any substantial improvement in confidence in the year ahead.

Housing activity

New housing activity in Victoria increased by four per cent in the September quarter.  Work on multi-units rose by 4.1 per cent and was 22 per cent higher than a year ago.  Work on houses was up 3.9 per cent, but renovation activity fell by 2.2 per cent.

Work done on new houses is forecast to increase from $8.6 billion in 2014/15 to $9.4 billion this year and by a further four per cent to around $9.8 billion in 2016/17.

Multi-unit construction is expected to rise by 12 per cent from $6.7 billion in 2014/15 to $7.5 billion this year, but to fall by 13 per cent to $6.5 billion in 2016/17.  Our forecast assumes that planned construction of some projects already approved will be deferred or abandoned.

Work on housing renovations fell by 3.9 per cent to $7.3 billion in 2014/15.  It is forecast to increase slightly to $7.4 billion this year and by 3.4 per cent to nearly $7.7 billion in 2016/17.

Housing approvals

The trend in dwelling approvals peaked in the March quarter 2015 at a record high annual rate of 73,700.   An abnormally high 53 per cent of these approvals were multi-units.  The trend fell to 60,800 a year in the December quarter and, as the underlying requirement for new homes this year is around 51,000, is likely to fall further in the months ahead.

Housing starts

Housing starts increased by 26 per cent in 2014/15, to just on 65,000. As a result, there is now no shortage of housing in Victoria.

The 48 per cent rise in multi-unit starts, largely the result of investor interest in apartments, was the main cause of last year’s boom.  Now, with the apartment market looking increasingly over-built and with investor finance dearer and harder to get, starts are falling.  Total dwelling starts are forecast or fall to 58,400 this year and 55,200 in 2016/17.

Housing Finance

In three months to November 2015, lending to buy housing increased by two per cent over the previous three months and was 17 per cent greater than in the same quarter a year ago. 

For owner occupiers, the value of loans approved rose by nearly 13 per cent and was 30 per cent greater than a year earlier.  Lending to investors, restricted by tougher lending conditions and falling demand, fell by 14 per cent and was three per cent less than a year ago.

In the three months to November, loans to investors made up 33 per cent of total lending: down from 42 per cent six months ago.

The value of loans to build or buy new homes increased by eight per cent and was two per cent greater than a year earlier.  All of this increase was in loans to owner-occupiers: the value of loans to investors in new homes was the same as in the previous three months but 26 per cent less than a year ago.

These recent developments in finance suggest that the demand for houses could remain firm for some time, despite falling demand for apartments.

Non-residential building

Work done on non-residential building was virtually unchanged in the September quarter, at a seasonally-adjusted annual rate of $9.8 billion.

Forward indicators of activity have weakened further.  In the year to September, work commenced fell 21 per cent short of work done; and at the end of September there was less than six months work in the pipeline, compared with more than eight months a year earlier.  This indicates that building activity is likely to slow in the year ahead. The trend in approvals increased slightly in the December quarter to an annual rate of around $7.2 billion: well below the $9.5 billion of work done in 2014/15.

Activity is expected to fall by six per cent this year to $8.9 billion and by a further two per cent to $$8.7 billion in 2016/17.

Engineering construction

The volume of work done on engineering construction fell by two per cent in the September quarterto a seasonally-adjusted annual rate of $10.3 billion but was about ten per cent greater than a year earlier.

 The value of work done in 2014/15, in 2013/14 prices, was $10 billion: two per cent less than work done in the previous year.

Forward indicators remain weak and we are forecasting that activity will fall by nearly four per cent this year to $9.6 billion.

Although there is still some uncertainty about the funding of some Victorian government projects, we are now forecasting an increase in activity of some two per cent in 2016/17.  A better than expected flow of funds could result in a bigger increase.