Credit squeeze impacts building starts – Geordan Murray

The credit squeeze that has been impeding investors for the past 18 months has expanded and is now impacting home buyers as well.  This tight squeeze on credit is accelerating the slowdown in building activity which is a major concern for the HIA.  Geordan Murray outlines their concerns.
Kevin:   We have spoken in the past on this show about credit and the tight credit squeeze and how that’s impacting the housing market around Australia. According to the HIA, that’s accelerating the slow down in building activity. Joining me from the HIA is Geordan Murray. Geordan, thank you very much for your time.
Geordan:   No problems.
Kevin:   I’m looking for the fees now and it would appear to me that there was an improvement 2016 to 2017 and you’re predicting a drop into 2018 and 2019. They’re project figures or forecast figures?
Geordan:   Yeah, absolutely. We’ve just done a review of our forecast for home building activity for the next three years and we do have a material decline forecast for 2019. It was a particularly strong year in 17/18 which came off the back of a moderation in the cycle during 16/17 and off that high level that we’re at now, we are expecting quite a significant decline of about 19% next year in total new home starts.
Kevin:   And what are you basing that on?
Geordan:   What we’re seeing is we’ve got a big pipeline of multi-unit dwellings that are about to come on to the market and we’re seeing a slow down on approvals coming in behind that as we work down that pipeline, we’re expecting approvals aren’t coming through as quickly as before. So that’s just natural that we’ll see quite a significant decline in that part of the market and, similarly, with detached home building, we’re seeing some slow down in leading indicators and that’s being corroborated with the information that we’re hearing from industry.
Kevin:   Housing supply and demand has a lot to do with property prices. With the slow down in construction that’s going to lead to lesser supply, obviously. With demand increasing, that’s going to have an upward tick on prices I would have thought.
Geordan:   Underlying demand isn’t really the issue that’s playing into the cycle at the moment. Australia has a very strong population growth rate at the moment. The latest figures show that population was growing at about 1.6% over the last year which is a very strong rate of growth. That’s been particularly strong in the East coast, capital cities, Perth, Melbourne and Sydney. And Brisbane is also starting to pick up as well now. In aggregate, across the country, we expect that underlying demand requires between 200,000 to 220,000 homes per annum.
Kevin:   These are new homes built. How many are we building?
Geordan:   At the moment, over the last couple of years, we’ve been building quite a strong level of activity and we’ve been in the vicinity of 220 to 230 eating into some of that accumulated shortage that we’ve built up over the previous decade.
Kevin:   So, Geordan, from what you’re saying there, we’re actually meeting demand and if we require that number of properties, we’ve been meeting demand since about 2014, 2015, according to your figures. So where’s the problem?
Geordan:   Over the last couple of years the level of home building has met the demand of the growing population. If you look further back, there was a long period there where new home building failed to meet the demand of the growing population-
Kevin:   In other words, you’re saying we’re playing a bit of catch up here.
Geordan:   That’s exactly what’s happened-
Kevin:   Why are you predicting that it’s going to decline when this last year, over the previous year, there’s actually been growth. I know you’re talking about the pipeline coming through. How quickly can that turn around?
Geordan:   Well, one of the biggest issues that we’re seeing at the moment is access to credit. Our home buyers are facing increased difficulty accessing credit. If you look back a little while we saw APRA introduce measures back in 2014 that put a cap on investor credit growth at 10% and then in 2017, APRA intervened in the mortgage market again, this time having interest only lending in the cross hairs. Throughout the housing upswing, we did see quite strong growth in interest only lending to the point where it was about 70% of new investor loans were on interest only terms and about 30% of owner occupy loans were on interest only terms .
Kevin:   Geordan Murray is from the HIA. Thanks for your time, Geordan.
Geordan:   No worries. Bye.

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