18 Oct No slowdown in new home building – Tim Reardon
There might be concern in some quarters about supply and demand but if it is anything to go by, our top 3 home builders built more homes in the past 12 months than in the previous year.
Kevin: Interesting insight now into the housing market, the HIA-Colorbond Steel Housing 100 Report just released, reveals what’s really happening with home building in Australia. Bit of a mixed reaction. I’m talking now to Tim Reardon from the HIA about this report.
Kevin: Tim welcome to the show. Thanks for your time.
Tim: Thank you, thank you very much.
Kevin: Mixed results here, but it does actually show that the top three builders actually built more homes in the last 12 months, headed up by Metricon, I think their number of new homes.
Kevin: Is it the second or third year in a row they’ve been the top builder?
Tim: Back to back to back, three years in a row.
Kevin: Three, yeah. It’s a great result for them.
Tim: It’s a remarkable achievement.
Kevin: Yeah, I think the top three, I think, as I said all built more. But after that, it tended to tail away. What did you find from the top 100? What are they doing, what’s their activity?
Tim: This was the first time in a number of years we’ve seen the number of homes build by those top 100 builders has fallen back. And that’s a very telling sign of what’s happening out in the market at the moment. The housing 100, the largest builders in the country are very heavily exposed to the Melbourne and Sydney markets.
Tim: In the Sydney market in particular, we know who’s been pulling back for the last 12 months. And we also have seen the very early signs of the Melbourne market as pulling back as well. It’s been pulling back since March. We know that from new home sales have declined every month since March. And that’s the first time that’s happened in Melbourne, I’m going to say probably for close to ten years now.
Tim: That’s a paradigm shift for them. I suspect in years to come we’re going to look back and say February was the best year that Victoria has seen, or the 12 months to February, the best 12 months Victoria has seen for decades. It may be a decade or more before they see those sorts of numbers again.
Kevin: Just slicing though the report too, I noticed, and pull me up if you think I’m wrong, but a couple of the major builders, Metricon Homes, as an example, GJ Gardner, they also build a lot in regional areas as opposed to the cap city areas and they’ve both shown a healthy increase in numbers.
Tim: That’s right. So, at the moment whilst we’re seeing the new residential suburbs in Sydney pull back and the expected new residential suburbs of Melbourne to pull back, it’s not true of the rest of the country. It’s not true of the rest of New South Wales or Victoria as well. When you look at the Hunter, it’s one of the strongest growing regions in the country. The ACT’s got a lot of activity. The south coast of New South Wales, and regional Victoria’s very strong as well.
Tim: Those two metropolitan cities have moved ahead of the rest of the curve. Sydney’s certainly leading the way. They’re 12 months ahead of Melbourne, I suspect. And we’re starting to see the declines that we’ve seen in WA over the past three years are beginning to ease. Although if you’re a builder in western Australia at the moment, you’re probably seeing some of the worst conditions you’ve ever seen in that market.
Kevin: JG King another one of the builders, I think that’s jumped up on the list, in certainly the top 20, probably for the first time, they’re a good regional builder as well. And a substantial increase, almost up by about 30% on last year.
Tim: Yes, I’m not sure all the reasons behind that one, whether it was acquisition or expansion of their existing housing stock, but one of the unique features about this report is that for the first time since we’ve been running this report, which is more that 18 years, that every Victorian builder increased their number of starts. We’ve not seen that universal increase of one state over all of the others previously. And that just reflects how strong the market has been in Melbourne, in particular, over the last five years.
Kevin: Meriton pulled back remarkably. They’re on the record as saying they’ve been very concerned about the Australian market, particularly the number of apartments coming on. Interesting to see their numbers fall year on year to, from what, 2,900, or close from 3,000, to just over 2,000. So that’s a major fallback, isn’t it.
Tim: Yeah, that’s very true. So, the error in the market that’s pulling back the most at the moment, is the Sydney apartment market. And the reasons for that are varied, particularly the APRA interventions in 2016 and again last year, are seeing investors withdraw from the apartment market quite rapidly. We’ve seen at least $6 billion of investment exit that investor market.
Tim: We also need to look at what’s happened to foreign investors and state governments have been very focused on forcing foreign investors out of the market. New South Wales imposed almost $100,000 additional stamp duty fee on foreign investors. The federal government imposed fees on consideration of overseas investments. And also the Chinese government has placed restrictions on the outflow of Chinese money.
Tim: All of those things have come together, at the same time that we’ve seen a depreciation in the dollar which means that in Chinese Yuan, we’ve seen a 12% decline in Sydney house prices, and that’s going to continue to ward off Chinese investors from returning to the Sydney apartment market.
Tim: From that perspective, that’s why we’re seeing that slow-down in Sydney apartment numbers and almost certainly the slow-down in Meriton’s numbers there as well. And I think there’s been a little bit in the news from Meriton in regards to that decision on their part. So I don’t think that’s a particular surprise. I think they’ve shown that they’re very shrewd investors in the market. I think … and possibly moving ahead of any changes that we’re going to see in the numbers.
Tim: The other thing to say, is that when you look at rental price inflation, rental price inflation is a much better indication of supply and demand equilibrium than house prices. House prices are telling us that supply exceeds demand at the moment, but rental price inflation has now moved to zero. And that’s the first time we’ve seen that since 1994. It’s not a coincidence that I mention 1994. Because it was until 2016, the highest number of homes that we’d ever built in the market before. So we can see from that, that when you increase the supply of new homes, that rental prices slow down. It’s happened in this cycle. And when they reach zero, that’s the best indicator we have that the market’s at equilibrium.
Tim: So, if you’re heavily exposed to Sydney apartment markets, knowing that there’s a very high volume of them still to come on over the next 12 to 18 months, then, yes, it would probably be a point at which it starts showing some level of caution about continuing to increase that number.
Kevin: Yes, certainly those signals coming from Meriton were a sign for us and that was happening about 12, 18 months ago. So, yeah, good sign.
Kevin: But I do think that the report gives us a really interesting insight into the health of the building industry in Australia and good to see it seemed to be going quite well in some of those regional areas. You highlighted Victoria there, but it seems to be in all the regional markets.
Tim: Yeah, lots of them, unfortunately, North Queensland is still experiencing quite a significant slump. It will be some time there before we start seeing some return to their mining boom or pre-mining boom days, but with the prospect of a few new mines up in the north, we’re hopeful that we might see some better numbers there. The WA, however, is probably still two years away before we start to see a substantial increase in their building activity. And the NT too, is still on its way down, as that gas project continues to wind up.
Kevin: Good insight. Thank you very much for your time. Tim Reardon there and that report is out from the HIA. It’s actually called the HIA-Colorbond Steel Housing 100 Report. Thanks for your time Tim.
Tim: Thank you.