Record number of houses are being built

Building activity; Consumer confidence

What happened? The total number of dwelling starts rose by 0.2 per cent to a 2½-year high of 51,662 units in the March quarter. Starts are up 13.1 per cent on the year. Total house starts rose by 5.9 per cent to a record high (since September 1969) of 36,395 units to be up by 40.6 per cent from a year ago. And at the end of March a record 75,824 houses were being built.

Implications: Australia’s property sector has strong momentum with residential construction to remain elevated over the next 18 months. Shares of building materials companies and property developers continue to perform well due to strong demand for new homes and renovation activity. The S&P/ASX200 materials index is up 13.9 per cent year-to-date with shares of Boral (+48.7 per cent) and Brickworks (+30.4 per cent) performing strongly.

Other economic data: The Westpac-Melbourne Institute Index of Consumer Sentiment rose by 1.5 per cent in July to 108.8. Four of the five major components of the index rose in July. Confidence dropped by 13.6 per cent in Sydney and 10.2 per cent in NSW, but rose 15.0 per cent in Western Australia and 10.5 per cent in Victoria.

Building & building material companies are affected by dwelling starts including Boral, James Hardie, Adelaide Brighton, Lend Lease, CIMIC, Dulux and Brickworks. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it mean?

• Residential building activity surged at the beginning of 2021. Demand for housing has been driven by record low interest rates, state government incentives and the federal government’s incredibly successful HomeBuilder scheme. With home prices lifting and confident buyers expressing a preference to live in detached houses during the pandemic, council approvals to build new houses have hit record highs, which in turn have translated into a record lift in dwelling starts. In fact, total house starts rose by 5.9 per cent to an historic high (records since September 1965) of 36,395 units to be up by 40.6 per cent from a year ago. And at the end of March a record 75,824 houses were being built.

• And while HomeBuilder grants expired on March 31, future residential building activity is expected to remain buoyant, despite disruptions caused by lockdowns, border closures, supply chain disruptions, skills shortages and building material price hikes. Already, the value of residential work in the building pipeline is at record highs in Tasmania ($729.8 million) and South Australia ($3.1 billion) in the March quarter, with Western Australia at 5-year highs ($4.4 billion).

• Leading indicators of construction and renovations, such as the Australian Industry Group and Housing Industry Association (HIA) Performance of Construction and HIA new home sales report, both imply that a large number of new houses will be entering the pipeline over the next 18 months. Commonwealth (CBA) Group economists expect dwelling commencements to remain elevated at 178,600 in 2021, before easing to 159,000 in 2022 as the boost from the HomeBuilder grant rolls off.

• With the August company reporting season imminent, commentary from ASX-listed building materials and property developers is expected to be positive with a focus on strong residential building and sales volumes along with rising prices, boosting earnings. According to Morgan Stanley’s recent 2021 AlphaWise survey, there is a strong buyer preference towards land and apartments, and away from established detached dwellings, suggesting affordability is a key consideration. But on the flip side, soaring building costs and tradie shortages could dampen sentiment.

• Another day, another surprisingly positive consumer confidence survey. Sentiment, as measured by Westpac and the Mebourne Institute, rose by 1.5 per cent in July, lifting from June’s 5-month low as Victoria (sentiment up 10.5 per cent) and Western Australia (sentiment up 15 per cent) both emerged from snap lockdowns. Westpac economists reported that the survey was taken over the week July 5-9, during the initial stages of Sydney’s latest lockdown, with sentiment in the Harbour City dropping 13.6 per cent in July and NSW confidence down 10.2 per cent. Overall, the survey was broadly positive with four of the five major components of the index higher in July, but confidence remains contingent on controlling persistent delta-variant outbreaks, speeding up the vaccine rollout and protecting jobs.

• Of course, today’s consumer confidence survey pre-dated yesterday’s announcement of an estimated $5 billion worth of government support for NSW households and businesses. In summary:

• The federal government will provide up to $10,000 a week to businesses with annual turnover of between $75,000 to $50 million that have seen a drop inturnover by at least 30 per cent because of an extended lockdown.

• Payments vary from $1,500 to $10,000 based on payrolls, and businesses will be required to maintain their staffing levels as of July 13, and sole-traders will receive $1,000 per week.

• Workers will receive $600 a week if they’ve lost 20 hours ormore of work, or $375 if they’ve lost between 8-20 hours ofwork when lockdowns enter a fourth week.

• The federal government and NSW government will split the costs of the business support package.

• Commonwealth (CBA) Group economists expect Sydney’s current virus lockdown to be extended for around four more weeks. And with government restrictions over the 7-week period potentially shaving 1.4 percentage points off national economic (GDP) growth in the September quarter it could potentially trigger an economic contraction. Of course, the situation is highly uncertain and the removal of restrictions and greater mobility outside of Sydney, could offset the fall in NSW economic activity.

What do you need to know?

Dwelling starts & work done – March quarter

• The total number of dwelling starts rose by 0.2 per cent to a 2½-year high of 51,662 units in the March quarter. Starts are up 13.1 per cent on the year. Total house starts rose by 5.9 per cent to a record high (records since September 1965) of 36,395 units to be up by 40.6 per cent from a year ago. But total apartment starts fell by 11.4 per cent to an 8½-year low of 15,083 units to be down 23.0 per cent from a year ago.

• Work started on 188,607 new dwellings over the 12 months to March, up by 7.0 per cent on the year. Starts fell from a record high of 234,440 dwellings in the year to June 2016.

• Across states and territories, starts in the March quarter: NSW (up 9.2 per cent); Victoria (down 15.1 per cent); Queensland (down 5.0 per cent); South Australia (up 16.1 per cent); Western Australia (up 18.7 per cent); Tasmania (up 14.7 per cent); Northern Territory (down 38.8 per cent); and the ACT (up 42.6 per cent).

• In the March quarter, the value of residential and commercial building work done rose by 3.0 per cent to be down 1.1 per cent on a year ago. New residential work lifted 4.8 per cent, alterations & additions rose 11.4 per cent and commercial building fell by 1.4 per cent.

• The value of residential and commercial building work in the pipeline stood at $92.8 billion at the end of March, up by 1.3 per cent on a year ago, but below the record-high of $99.5 billion at the end of June 2018. The value of residential work in the pipeline hit record highs in Tasmania ($729.8 million) and South Australia ($3.1 billion) in the March quarter with Western Australia at 5-year highs ($4.4 billion).

• Across Australia, 193,581 homes were being built at the end of March, down from a record 229,351 homes in March 2018.

Consumer confidence – July

• The Westpac-Melbourne Institute Index of Consumer Sentiment rose by 1.5 per cent in July to 108.8. The survey was taken over the period July 5-9. Four of the five major components of the index rose in July.

• Of the sub-components, the ‘time to buy a dwelling’ index rose by 0.8 per cent in July. The ‘house price expectations’ index lifted by 0.3 per cent. And the ‘unemployment expectations’ index rose (worsened) by 1.1 per cent in July after hitting decade lows in May.

Published by Ryan Felsman, Senior Economist, CommSec