The going is good at the moment
The industry figures so far have been good.
Australian Bureau of Statistics figures show building approvals hit a record high in March, driven by the surge in demand for apartments. According to the ABS, the number of buildings approved lifted a seasonally adjusted 2.8 per cent to 19,419 in March. These figures were well beyond January's all time high of 19,282 approvals. It shows there’s strong demand for housing at the moment, which means for the time being, the construction sector is healthy.
Approaching the peak
But Housing Industry Association senior economist Shane Garrett says we are now close to reaching a peak level in construction.
“The level of new home building we saw last year of about 200,000 new dwellings is unlikely to be sustained over the medium term. From next year, the level of home building will be much less,’’ Garrett says.
“We have estimated by rule of thumb there is a requirement for 180,000 new dwellings per year for the medium to long term and we think that is the kind of activity we will trend towards over the medium term.
“All in all, the residential construction cake in 2016 will be noticeably smaller than it will be this year and we also have to take into account that interest rates will start rising next year, probably in the second half.
“From 2016 we will see new home building decline. The number of new homes built will be quite a bit lower. It leaves the smaller builder in a more difficult situation.”
He says the renovations market has been in a slump for the last four years so many builders have been mixing up renovation with new building work.
Renovations to increase
So where does that leave the small builder? While renovations have been in a slump the last few years, they’re due for a resurgence next year.
“The silver lining to that cloud though, is that renovations will start to recover from 2016 onwards as the economy gets back on track. That will have positive consequences for renovation,’’ he says.
Riding the wave
For RMIT associate professor, Jonathan Boymal, the best way for smaller builders to handle a slowdown is to watch their costs, reduce delays and review their contractual obligations with sub-contractors.
“With high rates of competition having a slowdown in growth in demand… things [are likely to get] tougher,’’ he says.
“All things being equal, it will probably put more pressure on the industry to reduce costs and reduce delays. Margins are quite small at the moment, so they will have to look at other things that impact on costs like delays.”
He says this will have a greater impact than consumer and investor sentiment or, for that matter, interest rates, which he said only added uncertainties.