Category: Building & Construction

Is construction sector really facing “biggest fall since GFC”?

From The Real Estate Conversation.

Australia’s building industry, which has been largely fuelled up to this point by investor apartment construction, looks like it’s heading from boom to bust, if the recent report from economic forecaster BIS Oxford Economics is anything to go by.

The Building in Australia 2018-2033 report predicts building commencements will drop sharply over the next two years, driven by weakening domestic and foreign investor demand in the face of tougher lending criteria and increased foreign buyer charges.

BIS Oxford Economic’s Director, Adrian Hart says the “building sector is switching from being a strong growth driver to a drag on the economy”.

“Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, which is set to fall 50 per cent.

Hart notes the “very mild drop in residential commencements in 2017/18 is just the beginning”.

Slowdown won’t reach the ‘apocalyptic’ levels predicted

Despite the report, some are saying the fallback predicted won’t be as bad as what is being reported.

Tim Reardon, principal economist for the Housing Industry Association (HIA), told WILLIAMS MEDIA that while building growth is expected to slow, it is nowhere near as bad as the BIS Oxford Economics report would have you believe.

“The market has been slowing for the last 12 months, it peaked in 2016, and it’s still at one of the highest levels on record,” Reardon said.

“We are forecasting that the market will continue to slow over the next couple of years, but it will remain well above long term averages.

“Given we’re coming off a massive high, with a record number of new homes being built, the slowdown is well and truly expected and is well within the industry’s ability to cope.

“Victoria reached a peak in March this year and has begun slowing. With population growth slowing, we expect building growth to follow suit but we don’t expect anything other than a normal correction in the cycle.

“The previous peak prior to this cycle was 185,000 homes built per year. We’ve had three years with 200,000 homes built per year, and it appears we will continue building more than 185,000 homes per year for the next three years.

“While that is a slowdown it is nowhere near what they are saying,” Reardon said.

The Master Builders ‘Building Industry Outlook 2018’ also predicts that while there will be a slowdown, it won’t reach the crisis levels predicted in the BIS Oxford Economics report.

“It will be a challenging year for those who have come to rely on work on high-rise unit blocks, but there will be new opportunities in other sectors, such as tourism, aged care and student accommodation. It will be a much-improved year for those who build detached houses and those who operate out in the regions,” the report says.

“It will be a much-improved year for those who build detached houses and those who operate out in the regions.

Source: Master Builders

“Residential Master Builders forecasts 38,000 dwelling commencements in 2018 which will be a further moderation on the record highs seen in the past few years, equating to a drop of 4 per cent on the anticipated total for 2017. In 2019 we estimate dwelling commencements will remain low before beginning to move back up in 2020.

“Owner occupiers will increasingly move into the market, while investors will remain cautious. This will help to hold up the total value of work which won’t drop as sharply as the number of new dwellings. Demand will continue to shift away from large unit blocks.

“Concentrated population growth focused on the south east will favour unit developments, but smaller infill developments, like townhouses and boutique unit developments. Detached housing will also see growth where there’s land available” the report says.

“It is still a positive year for the industry,” Reardon concluded.

Dwelling Approvals Fall in May

The number of dwellings approved in Australia fell by 1.5 per cent in May 2018 in trend terms, according to data released by the Australian Bureau of Statistics (ABS) today.  At is all about a fall in unit approvals, with a notable decline in Melbourne.  Expect more falls ahead, a further signs of trouble in the housing sector.

“Dwelling approvals have weakened in May, driven by a 2.6 per cent fall in private dwellings excluding houses,” said Justin Lokhorst, Director of Construction Statistics at the ABS.

Among the states and territories, dwelling approvals in May fell in Queensland (4.2 per cent), Victoria (2.7 per cent), Tasmania (2.0 per cent) and Western Australia (0.8 per cent) in trend terms.

 

Dwelling approvals rose in trend terms in South Australia (4.3 per cent), Northern Territory (2.8 per cent) and Australian Capital Territory (1.5 per cent), and were flat in New South Wales.

In trend terms, approvals for private sector houses fell 0.5 per cent in May. Private sector house approvals fell in Queensland (1.7 per cent), Western Australia (0.6 per cent), South Australia (0.4 per cent) and New South Wales (0.2 per cent). Private sector house approvals were flat in Victoria.

In seasonally adjusted terms, total dwellings fell by 3.2 per cent in May, driven by a 8.6 per cent decrease in private sector houses. Private sector dwellings excluding houses rose 4.3 per cent in seasonally adjusted terms.

The value of total building approved fell 0.7 per cent in May, in trend terms, and has fallen for seven months. The value of residential building fell 0.8 per cent, while non-residential building fell 0.4 per cent.

The HIA said:

“The market is cooling for a number of reasons including a slowdown in inward migration since July 2017, constraints on investor finance imposed by state and federal governments and falling house prices.

“A slowing in Australia’s population growth since June 2017 coincides with changes to visa requirements announced early last year. Since then Australia has experienced almost a year of slowing population growth.

“Finance has become increasingly difficult to access for home purchasers. Restrictions on lending to investors and rising borrowing costs have seen credit growth squeezed. Falling house prices in metropolitan areas have also contributed to banks tightening their lending conditions which have further constrained the availability of finance.

Denmark introduces state-backed public housing covered bonds, a credit positive

On 1 July, legislation in Denmark took effect that will trigger the inaugural issuance of Danish public housing covered bonds (almene realkreditobligationer) as a new asset class, says Moody’s.

These new covered bonds will be issued out of newly established capital centres with the sole purpose of funding mortgage loans granted to public housing companies (almen boligforening). As is the practice in the Danish covered bond market, assets serving as security for covered bonds must be segregated into independent cover pools, referred to as capital centres in mortgage banks. The Danish government guarantees in full the mortgage loans as well as the public housing covered bonds.

The law is credit positive for potential investors in public housing covered bonds because their credit risk will be lower than in existing mortgage covered bonds. Although investors in both types of covered bonds benefit from recourse to the issuing mortgage bank and a pool of good quality mortgage assets, only public housing covered bonds benefit from a state guarantee in case the issuer fails to fulfil its obligations.

Today, public housing loans benefit from a municipality’s partial guarantee of the loan, but under the new framework such loans will benefit from the federal government’s guarantee covering the full loan amount. In 2017, Danish municipalities guaranteed on average the most risky 62% of mortgage loans. Under the new model, the government will charge a guarantee commission from the mortgage banks. The mortgage banks, owing to the government’s full guarantee, will have lower capital requirements and lower over- collateralisation requirements for the covered bonds that are set in Denmark at 8% of risk-weighted assets.

Denmark’s public housing covered bonds will be issued by mortgage banks via frequently held auctions and tap sales. For the issuance of public housing covered bonds, banks shall obtain bids for purchases from Denmark’s central bank on behalf of the Danish government before the bonds are sold to others, which reduces funding execution risk for the public housing companies and the mortgage banks. According to the Danish central bank, the government will purchase DKK42.5 billion of public-sector covered bonds in 2018, corresponding to the total of new loans and refinancings of existing loans. The government will bid at a rate corresponding to the yield on government bonds.

We expect a quick migration of public housing loans to the newly established capital centres in order to benefit from the government guarantees. This will lead to an increased level of prepayments and refinancings in the existing capital centres. The public housing sector has subsidised loans totalling around DKK180 billion that are largely financed by existing capital centres that issue mortgage covered bonds.

Nykredit Realkredit A/S, Realkredit Danmark A/S (part of Danske Bank) and BRFkredit A/S (part of Jyske Bank) are active lenders in this sector, each currently lending DKK50-DKK60 billion to the public housing sector. Despite the public housing loans being refinanced into the new capital centres, the risk characteristics of the capital centres will not change materially because the share of public housing loans is often small and in active capital centres does not exceed 15% as shown in the exhibit.

Tighter Credit Cramping New Home Sales – HIA

The HIA says their New Home Sales report – a monthly survey of the largest volume home builders in the five largest states – provides an early indication of trends in the residential building industry. The May edition is out, and as expected, tighter credit means fewer sales.  The largest reduction in house sales occurred in New South Wales.

New house sales declined by 4.4 per cent in May and are now 12.8 per cent lower than the most recent cyclical high that occurred in December last year.

“The first half of 2018 has seen a renewed downward trend in new house sales,” said Tim Reardon, HIA’s Principal Economist.

“Access to finance has become the barrier to ongoing growth in home sales.

“The availability of credit has tightened over the past 12 months with banks responding to the decline in house prices and the Banking Royal Commission by limiting lending to new home buyers.

“Australia’s population growth has slowed over the past three quarters in response to tighter visa requirements that have constrained inward migration.

“And for the first time in this cycle we are seeing sales declining in Melbourne.

“The new home market in Melbourne has been exceptionally strong over a number of years and we are now seeing a very modest slow-down in activity.

“While market conditions are slowing in Melbourne, building activity will continue to be solid given the very large volume of work still in the pipeline.

“The impact of the tighter constraints on finance will ease over the year.

“In fact we are expecting detached house starts to rise slightly in 2018 following the 2.8 per cent decline that occurred in 2017.

“Beyond that temporary lift, we expect the downturn in detached house building to properly take root in 2019 – and house sales appear to be providing a very early indication of this occurring,” concluded Mr Reardon.

During May 2018, new house sales declined in all five markets covered by the HIA New Home Sales Report. The largest reduction in house sales occurred in New South Wales (-6.8 per cent) followed by Queensland (-5.0 per cent), Victoria (-4.6 per cent), Western Australia (-2.4 per cent) and South Australia (-0.2 per cent).

New Homes Sales Down In Largest States – HIA

The HIA says new house sales fell in each of Australia’s five largest states during April. Nationally, sales have fallen each month of this year and in April they fell a further 4.2 per cent. New house sales for the year to date are now 3.1 per cent lower, than they were in the same period in 2017.

During April 2018, new house sales declined in all five markets covered by the HIA New Home Sales Report. The largest reduction in house sales occurred in Western Australia (-11.6 per cent) followed by New South Wales (-8.2 per cent), Queensland (-2.9 per cent), South Australia (-1.7 per cent) and Victoria (-0.1 per cent).

New house sales are a leading indicator of new dwelling approvals – and ultimately activity on the ground. New home sales were strong through most of 2017 and the fall back in sales reflects a modest slowdown in demand from both owner occupiers and investors.

There are a number of factors influencing this result. The most recent concern is that access to finance has been constrained as banks exhibit greater caution as house prices fall in key markets. Banks responding to falling house prices by increasing their requirements for collateral is an obvious reaction to the change in house price conditions.

The decline in house prices in Sydney and Melbourne also impacts on the market as more new home purchases are delayed and alternative investments become increasingly attractive.

The second concern is that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry may lead the banks to be increasingly cautious in lending for residential homes.

Australian banks have significant exposure through loans for the purchase of residential homes and the Royal Commission has highlighted concerns in other aspects of the banking industry. Lending for the purchase of home-ownership is an aspect of the banking industry that is closely monitored by a number of government agencies including the RBA, APRA and departments of treasury. This can be demonstrated through the number of interventions in the residential lending market in recent years.

Indications are that the growth in FHB participation has slowed after strong growth since July 2017. The re-emergence of FHBs is due to enhanced state government supports, the deceleration of dwelling price growth in key markets like Sydney and Melbourne working to make the home purchase more accessible to FHBs. Since January’s 2018 the FHB share has retreated marginally to 17.4 per cent in March. Even so, the number of FHB loans totalled 26,460 during the first three months of 2018, an increase of 28.0 per cent on the same time last year.

This upturn in first home buyer participation has been more than offset by a fall in the value of investor lending. The value of housing loans to investors peaked in August 2017 at $152.7 billion in the preceding 12 months. Since then investor loans have been falling quite steadily to $144.2 billion over the year to March 2018. This represents a reduction of 5.6 per cent on last August’s peak.

These risks need to be balanced against the strong population growth rate, solid employment growth and improving economic activity which is maintaining demand for new homes at elevated levels.

 

Building Approvals Fell In April 2018

The ABS reports that the number of dwellings approved in Australia fell by 0.1 per cent in April 2018 in trend terms.  We see a fall  in units, somewhat offset by a rise in houses approved. The seasonally adjusted numbers show a more significant drop.

“The total dwellings series has been relatively stable for the past eight months, with around 19,000 dwellings approved per month,” said Justin Lokhorst, Director of Construction Statistics at the ABS. “The strength in approvals for houses is being offset by weakness in semi-detached and attached dwelling approvals.”

Among the states and territories, dwelling approvals fell in April in Tasmania (3.7 per cent), Victoria (2.3 per cent) and Western Australia (2.2 per cent) in trend terms.

Dwelling approvals rose in trend terms in the Australian Capital Territory (14.8 per cent), the Northern Territory (6.7 per cent), South Australia (1.7 per cent), New South Wales (0.9 per cent) and Queensland (0.7 per cent).

In trend terms, approvals for private sector houses rose 0.9 per cent in April. Private sector house approvals rose in Queensland (1.6 per cent), Victoria (1.5 per cent) and New South Wales (0.6 per cent), but fell in Western Australia (0.9 per cent) and South Australia (0.4 per cent).

In seasonally adjusted terms, total dwellings fell by 5.0 per cent in April, driven by a 11.5 per cent decrease in private sector dwellings excluding houses. Private sector houses rose 0.1 per cent in seasonally adjusted terms.

The value of total building approved fell 0.7 per cent in April, in trend terms, and has fallen for six months. The value of residential building fell 0.5 per cent while non-residential building fell 1.0 per cent.

The HIA managed to put a positive spin on the results saying “Detached House Approvals Strongest in 15 Years”.

The performance of the detached house building market is remarkable. The volume of house approvals during the three months to April was 9.9 per cent higher than a year ago – a time when it was already elevated,” said Shane Garrett, HIA’s Senior Economist.

Strong demand for new houses is being sustained by healthy rates of population growth – itself a product of robust labour markets in Australia’s largest cities. While it’s a virtuous circle for detached house building at the moment, there are risks on the horizon.

More Weird Initiatives To Drag Buyers Into The Property Market

As the property market rotates, and demand slackens, property developers with a stock of newly built, or under construction dwellings – mostly high-rise apartments are trying tactics from deep discounting, cash bribes, or 100% mortgages to persuade people to buy. Remember there are around 200,000 units coming on stream over the next year or two and demand is falling.

Building approvals are also slowing. There is an air of desperation.

So we were interested to see (thanks to a tip off from our community) a WA initiative which was recently announced by Apartments WA – “Backed by the foundations of the BGC Group – Western Australia’s largest residential home builder and largest private company, we make your buying journey a seamless process from finding you the right apartment, assisting with obtaining finance, right through to settlement and key handover”.

They have “invented” the “Preposit”.  In essence a buyer gets to live in a property, whilst saving for a deposit, and when that deposit is accumulated, they can complete a purchase. Its a way to get currently vacant apartments occupied by people who ultimately may buy.   They call it ” the Afterpay© of the real estate industry”.   The weekly payments, would cover the equivalent of rent and saving for a deposit.

Finance is provided by Perth based Harrisdale Pty Ltd trading as The Loan Company. They hold a financial service licence.

There are few details on the Preposit site, and we have no idea of the financial arrangements below the surface. So we suspect any prospective  buyer should ask some hard questions about the overall risks and real effective costs. Remember that they are not an Authorised Depository Institution, so any money “saved” with them for a deposit could be at risk.

I put in a call to the company, who said they would call back to discuss “Preposit”, but they never did!

This is what the sponsored content on rewa says:

A new way of buying has hit the property market, allowing prospective buyers to live in their home, whilst saving for their deposit.

In a unique first for WA, “Preposit” is the Afterpay© of the real estate industry and means you can ‘move in today and pay for it tomorrow’.

The Apartments WA exclusive product allows you to move into an apartment immediately, then begin to make weekly payments that are stored away for you until you’ve saved your deposit.

Apartments WA Sales Manager Chad Toquero said Preposit addresses one of the biggest stumbling blocks in home ownership – the deposit.

“Preposit appeals to all buyers who can afford the loan repayments but are finding it difficult to save for a deposit – there is nothing else like this in the market and Preposit appeals to those looking to buy and those who are currently renting but want to own their own home in the future.”

Apartments WA have also partnered with Loan Co to offer their clients access to a wide range of lenders. As each person’s financial circumstance, and thus borrowing capacity is different, Loan Co will work with each individual to pre-qualify them for a loan upfront. Preposit just allows the buyer to live in the property, while saving for their deposit.

This new way of purchasing is flexible, negotiable and customised to suit the needs of every individual.

Mr Toquero believes Preposit has the potential to make home-ownership become a reality for more people.

“We want Preposit to make home ownership easier for those who want to take advantage of the property market now and their only hurdle is saving for a deposit,” he said.

“The only catch is you have to be able to afford your mortgage repayments and pre-qualify for a loan.

“As long as you can afford the repayments but don’t quite have the deposit right now, we can get you into one of our apartments.”

Here is their FAQ.

What is Preposit ?​
Preposit is a unique initiative created by Apartments WA to help people save for their deposit, whilst being able to live in the apartment at the same time.

So how does it work?
We help you find your dream apartment and then introduce you to our finance experts to work out how much you can afford to borrow. The difference between the purchase price and what you can borrow is the deposit you’ll need to save. Once you receive finance pre-approval to purchase the apartment, we give you the keys to move in and you start saving for your deposit in weekly payments. We then store away these payments away until your deposit amount is achieved, which we give back to you as your deposit toward purchasing the apartment.

Is there a minimum amount required to qualify for Preposit?
No. Everyone’s individual situation is different, and we’ll work through finding the best solution for you.

What properties is Preposit applied to?
We have a range of apartments in selected areas across Perth currently available.

Is this a Government Scheme or Shared Equity?
No. Apartments WA understands that saving for a deposit is one of the biggest hurdles when looking to buy a property. And we want to help.

Sounds too good. What’s the catch?
There’s no catch. You agree to purchase the property upfront, and then get to move in whilst you save for your deposit. Once you’ve reach your deposit amount, you settle on the apartment and then its yours.

How do i know if i eligible?
Complete our enquiry form and we’ll give you a call.

March Building Approvals

The ABS released their building approvals data to end March 2018.

The number of dwellings approved in Australia rose in March 2018 in trend terms, with a 0.2 per cent rise.

This is being driven by approvals for private sector houses, which have now risen for 13 consecutive months. They are now at their highest level since 2003, in trend terms.

Approvals for private sector houses rose 0.8 per cent in March. Private sector house approvals rose in Victoria (1.8 per cent) and Queensland (1.5 per cent), but fell in Western Australia (2.1 per cent) and New South Wales (0.2 per cent). Private house approvals were flat in South Australia.

But units continue to fall, so overall the biggest trend increase in dwelling approvals in March was in the Australian Capital Territory (28.0 per cent), followed by the Northern Territory (5.3 per cent) and Queensland (2.3 per cent).

There were falls in trend terms in Western Australia (6.7 per cent), Tasmania (4.8 per cent), Victoria (0.5 per cent), New South Wales (0.2 per cent) and South Australia (0.1 per cent).

In seasonally adjusted terms, total dwellings rose by 2.6 per cent in March, driven by a 6.1 per cent increase in private sector dwellings excluding houses. Private sector houses rose 1.1 per cent in seasonally adjusted terms.

The value of total building approved fell 0.6 per cent in March, in trend terms, and has fallen for six months. The value of residential building rose 0.4 per cent while non-residential building fell 2.5 per cent.

New House Sales Fall for Third Consecutive Month

The HIA New Home Sales report – a monthly survey of the largest volume home builders in the five largest states – provides an early indication of trends in the residential building industry.

During March 2018, new house sales declined in three of the five markets covered by the report. The largest reduction in house sales occurred in South Australia (-11.4 per cent), followed by NSW (-10.2 per cent) and Victoria (-7.2 per cent). Two states bucked the overall trend, with the largest increase in new house sales in Western Australia (+26.2 per cent) and more measured growth occurring in Queensland (+2.7 per cent).

“Detached house sales fell again in March – meaning that declines have occurred in each of the first three months of 2018,” commented HIA Senior Economist Shane Garrett.

“New detached house sales were down by 2.0 per cent during March following a 0.7 per cent fall in February,” added Mr Garrett.

“The reduction in new house sales in Sydney and Melbourne is likely to be the result of tighter lending policies for investors being imposed by APRA.
“There has been a welcome increase in first home buyers participation which has partially offset the fall in investor involvement in the market.

“Economic recovery is underway in Queensland and WA – and these two states were the only ones to see new house sales rise during March. Detached house building has always been of considerable importance in these two markets.

“HIA’s new house sales index is a leading indicator of activity on the ground. Based on today’s results, new house building activity is likely to move lower on a national basis over the next few months,” concluded Shane Garrett.

 

Investor retreat is behind apartment downturn – HIA

More data showing the impact of the fleeing of property investors on the property market.  We suspect the decline will continue as credit rules are tightened.

The HIA begs for no further constraints on this sector of the market, but with one third of loans for investment purposes, it is still too high. Remember the Bank of England got twitchy at 16%.

“Investors have been the target of a number of regulatory interventions and we are now seeing this impact on residential building activity,” said HIA Senior Economist, Geordan Murray.

The ABS today released building activity data for the final quarter of 2017. Detached house commencements increased by 0.7 per cent over the December 2017 quarter, while starts for other dwelling types (predominantly apartments) declined by 11.2 per cent.

“The decline in multi-unit dwelling starts has dragged down the total number of new home starts during the final quarter of 2017. The total number of dwellings starts fell by 5.0 per cent in the December 2017 quarter and was down by 8.3 per cent on the level recorded a year earlier,” added Mr Murray.

“In contrast to the decline in multi-unit starts, the resilience of the detached house market continued to shine through. The number of detached house starts during the December quarter of 2017 increased by 0.7 per cent over the quarter and was up by a similar amount compared with the level of a year ago.

“Despite the soft starts result in the quarter, the pipeline of multi-unit activity remains quite large. There were still over 150,000 multi-unit dwellings under construction at the end of the 2017, which is only slightly below the 155,000 level at the peak of the cycle. There are a further 33,800 dwellings in projects that have been approved and are yet to start work, this is a record high.

“The combination of falling commencements and the build-up of dwellings in projects awaiting commencement is somewhat concerning. It is likely to indicate a slowdown in pre-sales activity. New projects will not commence construction until they achieve a satisfactory level of pre-sales.

“Pre-sales to investors, both domestic and from overseas, have been important for many multi-unit developments. With additional taxes on foreign investors and regulators clamping down on investor lending, investors have retreated from the market.

“If we see investors return to the market and the approved projects continue to progress through to work on the ground then residential building work could potentially make a stronger contribution to economic growth this year than we are expecting.

“Now is not the time to impose additional taxes or constraints on investors,” concluded Geordan Murray.