Low interest rates to spur strong residential building recovery over next three years: MBA

The embattled residential building sector is forecast to recover strongly over the next three years, with the catalyst being low interest rates. 

However, the strong growth phase won’t extend to the non-residential building sector with only “modest growth forecast” while there will be a contraction for engineering construction as the mining investment boom slows and big resource projects are completed.

Masters Builders Australia (MBA) forecasts the value of residential building work done, in real terms, to grow from $46.2 billion in 2012-13 to $60.9 billion in 2015-16. 

Over this same time frame, dwelling starts are predicted to rise to 164,000 in 2013-14, 179,000 in 2014-15 and 183,000 in 2015-16 – more than a decade after dwelling starts peaked at around 175,000 in 2004. 

This follows a number of years of contractions with many high-profile building companies collapsing including Kell & Rigby, St Hilliers Construction, Reed Construction, Baseline Constructions and Nahas Construction.

A NSW government inquiry into the sector last year found that one in three company collapses in the state were building companies.

MBA chief economist Peter Jones says the forecasts indicate there is “light at end of a very long tunnel for the residential and commercial building sectors, but does not herald a return to boom era levels”. 

The building and construction industry group basis these bullish forecasts on the underlying assumption that low interest rates will work to “release significant pent up demand after a long period of under-building that occurred at the same time as Australia experienced strong population growth”. 

The forecasts have been developed by Master Builders in collaboration with Independent Economics. 

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“The stronger performing states are forecast to be Queensland, New South Wales and Western Australia,” says Jones. 

“The key risks to the forecasts are frail consumer confidence, economic uncertainty, asset price volatility and ongoing softness in the labour market. 

“The improvement in the residential building outlook comes from a very low base and the challenge remains for policy makers to address supply side inefficiencies and impediments that have contributed to the nation’s growing housing shortfall,” he says. 

Non-residential building work done is predicted to decline further in real terms in 2012-13 followed by modest growth in the following years. 

Growth is expected to be driven by commercial and industrial building sectors, contrasting with weakness in social and institutional sectors and education related building. 

“For non-residential building, strongest performing states are forecast to be NSW, Queensland and Victoria, with industrial, retail and office building leading the way. 

“The key headwinds and risks are poor cash flows, low margins and tough lending criteria. Investor confidence also remains low reflecting current economic conditions,” Jones says. 

In the engineering construction sector, activity is forecast to increase 5.4% in real terms to $122.1 billion in 2012-13 before falling back 12% to over the following three years to a level of $108.0 billion. 

“After very strong growth, engineering Construction activity in the Northern Territory, Western Australia and Queensland are forecast to fall back, albeit remaining at extremely high levels in an historical context. Victoria and Tasmania look set to benefit from stronger infrastructure spending,” Jones said.