Australian construction activity likely to slow in remainder of 2016

The Australian housing sector, which has been a major economic driver in the last two years, is coming close to a broad peak. Considerable additions to the housing supply and tighter lending criteria are expected to lead to slower expansion in construction activity and prices through the rest of 2016 and into 2017, said ANZ in a research report. The contribution from the housing sector to the economy is likely to ease.

On the policy front, the APRA’s macroprudential regulation set up last year has had the desired effect of decelerating growth in investor borrowing, while the total credit growth is easing, noted ANZ. Moreover, tighter borrowing criteria have also been targeted at foreign buyers. Several major lenders have executed a combination of stricter measures around gauging serviceability, or exited this market entirely, said ANZ.

In recent times, many state governments have either set up new or increased current taxes on foreign buyers. Together, these measures might lower demand from foreign buyers. From here on, drop in demand is likely to result in deceleration in price growth.

“From a peak of 12.8 percent y/y in September 2015 and 8.1 percent currently, we expect national house prices to rise by 6.4 percent and 1.7 percent in 2016 and 2017 respectively,” added ANZ.

Also, a moderation in construction activity is likely. Approvals for building continue to be lower than the peak seen in 2015. This implies that the rapid growth in starts and work done is not expected to be sustained. But a huge backlog of work is expected to keep on underpinning construction around record levels.

Indeed, a huge backlog of construction work indicates a risk of oversupply coming in certain markets. Considerable additions to the apartments supply are forthcoming in Melbourne and Brisbane. This increases fears of settlement risk and ultimately price drop, according to ANZ.