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Home building outlook grim as weak prices hurt property market confidence

The Housing Industry Association (HIA) has recorded a 12.8% fall in new home building for the last quarter and warns of “deteriorating conditions” for the housing industry.

The HIA is forecasting a 5.9% decline in starts in 2012, to a level of just 139,360 with only a modest recovery to 151,200 predicted by 2013-2014.

HIA senior economist Andrew Harvey told SmartCompany there had been significant weakening on the horizon over the past 18 months.

“If you look across the state economies one of the big drivers is the Victorian market coming off record highs so that, in a sense, was inevitable,” says Harvey.

“However, once you look outside Victoria there is long-term weakness in other states.”

“The number one issue in terms of why new home building is so low is the level of taxation on new housing.

“The primary issue outside of that is confidence at the moment.

“Consumers are being pretty cautious and paying down debts, so when you get an interest rate cut it does not have the stimulatory effect it did in the past.”

The HIA is predicting at least one further interest rate cut by the end of the calendar year.

“We really think it would make a lot of sense for the Reserve Bank of Australia to cut rates at the May meeting,” says Harvey.

Paul Braddick, head of property research at ANZ, told SmartCompany the bank was seeing the same deteriorating conditions in the market as the HIA. 

“We are quite pessimistic about the new home building outlook for the next 12 months, you just have to look at the approvals numbers over the last year,” says Braddick.

“It is not yet even showing signs of finding the floor before seeing any upswing.

“From our perspective we are quite clearly underbuilding, new dwellings are running at a completion rate of 120,000 at the moment comparing to a long-term average of 150,000.

“Our estimation of housing demand based on demographics is 180,000.”

Braddick warns there is a significant housing shortage, particularly in the NSW market, and the level of building scheduled over the next 12 months will exacerbate the shortage.

“Until prices find a floor and housing market sentiment generally starts to improve we are unlikely to see a sharp turnaround in building activity, particularly if we only get one more interest rate cut.

“It is hard to see what the catalyst for the turnaround is actually going to be in the next few years.”

Cara Waters

SmartCompany editor

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Cara Waters is the editor of SmartCompany. Previously, Cara was a senior reporter at the Financial Times website FT Adviser in London and she also worked for The Sunday Times in London.
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