The collapse of the housing industry is on the way

BIS Oxford economics managing director, Robert Muller, says we could see the housing construction industry fall 30 per cent in 3 years

Introduction: The Collapse of the housing industry is on the way

Ross Greenwood: There is something that’s holding really the economy together, at the moment. This is high-end building. Now, as you’re aware, Australia’s got what now the record for the longest period without a recession. Now, that is not only the mining boom that we had but we weathered the downturn largely because as interest rates fell, people got out there and started not only buying houses but building houses. This made up for the shortfall, incredible shortfall we had in many of our capital cities as their population increased.

Now, that building boom has just kept on going. As we know, the house prices, Melbourne, Sydney especially, have really gone to, well, many people claim, unsustainable levels, as compared with incomes but they’ve kept on going. Well, right now, BIS Oxford Economics is saying that the building boom is now past its peak. One of the best observers of real estate in this country is the BIS Oxford Economics managing director, Robert Miller who is on the line right now. Robert, great to have you on the program as always.

Interview: Robert Millar, Managing Director, BIS Oxford Economics

Robert Miller: Thanks very much, Ross. Good day.

Ross Greenwood: Just explain to me why you think the building boom is past its peak?

Robert Miller: Well, I suppose the evidence is already there in the fact that in the last 12 months, new residential building approvals are down about 8%. We’d say that probably translates into about a 6% decline in commencement terms, which is the way the industry measures it that still means activity is operating at about 219,000 starts across the country off the peak of about 232,000. But look, the last three years, we had about 220,000, just over starts a year for three years running on average, you could say.

The underlying level of demand, the number that we always calculate per se, trying to understand whether we’re building too many or too few. That calculation is based on population growth and people’s ability to form separate households. That number’s about a 184,000, so we’ve basically been satisfying a lot of that pent up demand. Yes, particularly in Sydney and Melbourne. But in other parts of the country, it’s ultimately resulted in an oversupply.

Yes, probably at the moment, there’s a small deficiency, maybe in Melbourne and a reasonably, sniffing at numbers still in Sydney but elsewhere, yes, we are in significant oversupply in Western Australia, modest in South Australia, and Northern territory and clearly even in Queensland, particularly, in the inner city of Brisbane market, massively oversupplied.

Ross Greenwood: I’m going to say you’re optimistic in this regard. What do you reckon the catalyst has been for the decline in the new starts, in other words, the approvals going forward? Is it the attitude of the banks? Is it the attitude of the developers? Is it the attitude of the Government and Council? Who is pulling the breaks on?

Robert Miller: Look, I think they’ve done a sensible thing because yes– Well, sorry, the regulatory bodies in the financial sector, otherwise known as APRA, tied things up in terms of lending practices. That’s led the banks to have to change their interest rates with respect to interest-only loans to investors that have probably risen out and are maybe three-quarters of a percent in the last six months. There was obviously moves on their part two years or so ago.

That did lead to a little bit of slowing but basically, last year, things rebounded in the investor sector. Look, if they hadn’t taken that action, the market could’ve gone over the top even more. Yes, look, the market went right over the top, particularly in Brisbane and to a lesser degree, in Melbourne. Even Sydney is not sustainable at current construction levels in a long term sense.

Ross Greenwood: I was going to get to that point because quite clearly, as we’ve observed, it’s been that building boom that has largely held the Australian economy going, especially as the mining sector came off. If the building booming falls over the next three years, what’s holding the Australian economy up when you’ve got very strong forecast from the Reserve Bank and also from the Australian government in the budget? What is it that actually keeps the momentum in the economy going?

Robert Miller: Look, very simply, we won’t get 3% economic growth which is what treasury numbers are in the budget, if not this financial year, certainly, the two years beyond. We won’t get to 3%. I can —

Ross Greenwood: In other words, you’re saying the budget numbers basically a fool’s gold and even though as ideas, that you get back to surplus by 2020-21 that that’s certainly not only if you don’t achieve those budget numbers.

Robert Miller: No. It’s way over-optimistic and I think there’s already indications that the Reserve Bank probably in their latest statements that may be growth might be quite as strong as– previously expected. Yes, we would say it’s going to sit more in the 2.5-2.7 range over at least the next two years. Maybe even three years after 2020. It’d be foolish at the moment to think even if you wanted to suggest that forecast a little bit over pessimistic. And I’d have to say in 35 years of forecasting, most downturns end up being worse than my predictions and were pretty cyclical as a forecaster and conversely booms tend to be greater. If anything, I don’t think we’re overly pessimistic and if we are it’s probably only by a modest 5%. It’s really a question. We had a 5% decline. We’re going to see another 25%. Even if it is only 20% from current levels, yes, we will see construction back around 170,000 but could end up as low as 160,000 as we are suggesting it.

Ross Greenwood: It’s going to be really interesting for the Australian economy if that occurs. And that’s just a little warning sign out there for people to understand that forecast is coming from one the really best observers of our real estate industry over a very long period of time including building the managing director of BIS Oxford Economics, Robert Miller. And, Robert, as always, appreciate your time.

Robert Miller: Thank you very much, Ross.

 

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