The great Australian dream? South East Queensland's home building industry

PROPERTY

The Great Australian Dream is the belief that home ownership is the key to leading a comfortable, secure and successful life. However, given the rapidly changing society we live in, how is this dream going to be serviced now and into the future?

We analyse the market forces of demand, supply and competition that are driving the South East Queensland home building industry and the future outlook for home builders.

A great Australian dream

Read our more in depth analysis below:

DEMAND

There are two key elements to consider with demand.

1. Housing affordability

2. Population

1. Housing

Housing affordability is impacted by a number of factors, including:

  • interest rates – the current low cash rate has increased mortgage affordability, although this may change if the RBA increases the rate over the coming years or there are further out-of-cycle rate hikes.
  • wage growth – growth has decelerated for the last three quarters (around the same level as inflation) making it harder for borrowers to meet mortgage payments.
  • house prices – there has been strong growth in the median house price, which has increased average monthly mortgage repayments. Growth in house prices has been higher than wages growth and has been on continuous upward trend since 2013 as seen in Figure 1 below.

Housing affordability is a key issue in Australia’s political climate, with all states providing first home buyers assistance.

The Queensland Government provides eligible first home buyers with a one-off grant of $15,000 (down from $20,000) for brand new homes up to a value of $750,000 from 1 July 2018. There is currently no set end date for the grant.

Notwithstanding housing affordability issues, first home buyer activity in Queensland has shown an upward trend from June 2016 through to January 2018, as shown in Figure 2 below. 

Going forward, the first home super save scheme introduced by the Australian Government in the 2017-18 federal budget should also improve affordability for first home buyers.

This scheme will enable those who qualify to make voluntary concessional (before-tax) and non-concessional (after-tax) contributions into their super fund to save for a first home.

These voluntary contributions and any accompanying earnings may then be withdrawn and used to pay for a first home. 

2. Population

Population growth is a key driver of housing demand, with an increasing trend in interstate migration to Queensland. This is depicted in Figure 3. Perhaps most encouraging is the increase in net interstate migration during 2016 and 2017 as interstate residents are attracted to Queensland’s lifestyle and affordability.

Queensland’s population is expected to continue to grow over the coming years, which will continue to drive demand for new housing.

Overall, the level of demand for new housing construction is best indicated by the number of dwelling commencements.

HIA forecasts detached home starts in Queensland to decrease slightly in 2018 and 2019, as shown below. However, the decrease in multi-unit commencements is expected to be significant.

SUPPLY

There are three key elements to consider with supply:

1. Land

Research undertaken by the Urban Development Institute of Australia shows that South East Queensland remains second to Melbourne in residential lot release output and was the only market to record an increase in lot releases (+2%) during 2017. Further, despite a continued decrease over the past 5 years, the median lot size in South East Queensland remains the second highest of all major Australian markets at 447 square metres behind the ACT.

South East Queensland’s comparative land advantages are largely driven by the region having a greater availability of serviced land for new subdivisions than most other states as noted by IBISWorld. However, with increased environmental regulation expected and the lead time required for available land to translate into increased supply, this is more of a medium to long term consideration.

2. Materials

IBISWorld expects purchases for construction materials and other inputs to consume 35.2% of industry revenue in FY18, which has increased slightly over the last five years due to rising input prices, notably cement, concrete and sand products.

Large operators can gain economies of scale from input material purchases by standardising material requirements across house designs to secure substantial bulk purchasing discounts.

Forecast lower construction activity in the non-building infrastructure sectors over the short to medium term is expected to result in limited price growth in construction materials during the same period.

3. Tradespeople

There is currently a shortage of skilled tradespeople due to the increase in apartment construction in South East Queensland, and competitive wages are required to maintain contractors. These shortages may impact construction times, monthly turnover and margins in the short term.

However, the forecast decrease in apartment construction in Brisbane should increase the supply of contractors and ease upward pressure on wages. Figure 5 and Figure 6 below depict the number of apartments currently under construction and the number of building approvals within Brisbane. We forecast that based on available 2018 data to date that building approval levels will plateau in 2018.

COMPETITION

The level of industry competition is high, reflecting its fragmented nature with many small contractors operating in single areas.

Product differentiation is important and reflects:

  • Proven quality
  • Design options
  • Efficiency and timeliness of project completion

Price competition ensues where builders meet the above factors

Recently, several leading home builders have entered new regions through acquisition or new land investment, allowing builders to balance demand across several markets and provide economies of scale.

Developers may offer discounts on house and land packages, assistance with mortgage payments and generous incentives. Stockland and Peet have offered gift cards and rebates ranging from $30,000 to $50,000 on home sales.

Success factors

IBISWorld identifies the following key success factors for businesses in the home building industry:

  • membership of an industry organisation (e.g. HIA or MBA) to ensure eligibility for insurance and industry-based accreditation
  • access to highly skilled workforce
  • high prior success rates, which are more likely to lead to repeat business
  • ability to expand and curtail operations rapidly in line with demand
  • access to the necessary amount of land/type of property.

Competitors

Figure 7 and Figure 8 compare historical activity levels for a sample of builders competing in South East Queensland. Both graphs clearly demonstrate the increased level of activity resulting from the introduction of the Brisbane City Plan 2014 which allowed high density development in areas close to the CBD and transport hubs.

FUTURE OUTLOOK

  Population growth 
  Hosing affordibility
  Restrictions on foreign investment
  Short term construction activity
  Long term construction activity

With respect to the current conditions we expect the following factors to favourably influence the sector:

a) continued population growth
b) improved general economic conditions.

We see the current unfavourable conditions influencing the sector as:

a) reduced housing affordability due to expected increases in interest rates and house prices
b) restrictions on foreign investment and caps on lending to investors by APRA

Anecdotally, industry participants’ expectations for the remainder of 2018 include:

(a) continuing low interest rates
(b) continuing modest gains in net interstate migration gains to Queensland
(c) forecasts of stable building activity
(d) further delays to land production in Queensland resulting increased cycle time from deposit to contract signing and housing starts
(e) below trend economic growth in Queensland
(f) margin pressure due to trade shortages and high demand for drafting, estimating and supervisors
(g) high competition for market share, including price cutting by competitors.

House construction is expected to account for $6.4 billion in FY18 and fall by 2.3% to $6.2 billion in FY19 as depicted in Figure 9.

IBISWorld estimates total revenue for the home building industry in Australia will be $44.7 billion in FY18, and is expected to grow by 1.6% per annum in real terms over the five years to FY23. IBISWorld estimates that Queensland accounts for 19.6% of the total industry, which is approximate to the state’s share of the annual population growth and economic activity of around 20%.

Overall, the home building industry appears have peaked in 2017, with slower activity expected for the remainder of 2018. However, longer term forecasts from IBISWorld, HIA and MBA show a more positive outlook for the industry. 

How can we help?

We have a team of experienced property professionals with extensive involvement in the residential sector. This team includes our Azurium Real Estate experts who have coalface experience stemming from their background in senior leadership roles at market-leading organisations.

Where appropriate, our team can work with and advise developers and financiers with regard to their exit strategy, facilitating project completion, mitigating settlement risk and sale of remaining stock.

To find out more, or for further information as to how we can assist, please contact one of our property team members below or our Azurium Real Estate experts.

 

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