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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 27 November 2016

HIA forecasts downturn for housing starts (not for the first time)

Housing starts to decline?

The Housing Industry Association (HIA) sees housing starts dropping very significantly over the next three years, driven downwards predominantly by reduced multi-unit construction, forecasting a sharp "slowdown in activity".

Source: HIA

Over the year to September 2016 building approvals totalled some ~238,000 as I looked at in more detail here, so although on balance likely, these results are not yet locked in. 

Forecasting (in)accuracy

Although the HIA forecasts are usually taken to be a given by market commentary, it is worth noting that as an industry body the HIA is unlikely to make overtly bullish forecasts for housing starts, and indeed it has consistently underestimated actual commencements.

For example, the HIA believed that housing construction had "reached the summit" in 2015, with its forecasts undershooting what actually happened this year by nearly 15 per cent.

Rewind to the respective 2014 forecasts and the HIA had predicted a downturn playing out by 2016, lamenting that policy failures would fail to see an increase in new home building in 2015 and 2016:

"It is unfortunate that policy makers have failed to grasp the reform initiative required to compliment record low borrowing costs and send new home building levels higher in 2015 and 2016".

The forecasts released in that year undershot by an even wider margin, at 16 per cent.

Go back to 2013 outlook, and although the HIA saw a "brighter year ahead" the 3-year forecasts were so wide of the mark that even a dart board would have been closer. 

Step back further still to August 2012, and the HIA saw recessionary conditions facing new housing, just before the greatest construction boom on record: 

"Combine low confidence with very tight credit conditions and excessive taxation, and you have the unpalatable recipe for the recessionary conditions facing new housing,” added Harley Dale. “Leading indicators suggest this situation will persist well into 2012/13.”

Of course, forecasting almost anything three years out is virtually impossible, and as we don't know the counter-factual the HIA might justifiably argue that more upbeat projections might have resulted in complacency.

The wrap

The HIA sees housing starts declining from an unsustainably high ~230,000 over the 2016 financial year to ~172,000 by 2018/19.

The building approvals figures for October 2016 will be released on Wednesday.

The September figures hinted that trend approvals may now at last be beyond their peak.

This week the government tweaked the rules pertaining to foreign buyers of apartments, allowing non-residents to purchase new apartments that have failed to settle.

While this may be a technicality, it does demonstrate that Treasury has become well aware of settlement default risk, and as such is prepared to put in place combative measures.