In a new Global Research note from a team of UBS analysts headed by Economist George Tharenou, UBS sees “upside risk” for the domestic construction sector – meaning, more likely than not, more houses being built.
The news demarcates, if the analysis proves sound, a line between the COVID-19 ‘struggle era’ for construction and what could be considered ‘recovery.’
After all, as UBS noted on Wednesday, dwelling commencements in Q3CY24 lifted 4.6% QoQ, the highest level since Q1CY23 – the same year overall commencements were at an 11 year low, according to the Housing Industry Association (HIA).
“Dwelling commencements in Q3-24 lifted 4.6% q/q, the largest increase since Q1-23,” the analysts wrote.
“More recently, monthly residential building approvals also show a recovering trend, with the 3-month average in November 2024 increasing to 180K, the highest level since 2022.
“We still expect RBA rate cuts in 2025 of a cumulative -75bps. Hence, we still forecast a modest recovery of dwelling commencements in 2025 to 180K; and then a further life in 2026 to 200K.”
Of course, this would still be comparatively low, depending on what frame of time you decide to cross-reference – suggesting we aren’t seeing any magical supply issue fix to the housing crisis that is driving up home prices to either joy or chagrin.
But isn’t all good news.
Take, for instance, mounting evidence dwellings listed for sale are on the rise. This comes as house price growth has most recently gone flat (though still far higher than pre-COVID), leaving UBS to conclude house affordability is, not in their words, at unsustainable levels (assuming ‘sustainability’ includes housing affordability.)
“On the downside, with dwelling prices recently slowing sharply towards a flat trend (and dwellings listed for sale are also up sharply,) this suggests housing affordability is extremely stretched,” UBS analysts wrote.
The use of the term “extremely” is surely of noteworthiness.
UBS also sees migration in Australia slowing in the coming years, affecting demand. But that demand needs to be contextualised in a market where prices are already onerous – it also needs to be contextualised in the language of the UBS note: “ease somewhat.”
But that doesn’t mean the price of your house is likely to fall anytime soon. Nor is GDP-basis dwelling investment likely to suffer.
“Our models of underlying housing demand still show a record underbuilding of housing has accumulated, which should provide a significant ongoing support to the housing market,” UBS analysts wrote.
What could perhaps be of most interest to those looking for good news re: supply – the residential pipeline (nationwide) of work yet to be done is around record highs, jumping 4.2% YoY in Q3-24 to nearly $61B.
But inflation still remains the quo. UBS noted the pipeline of work yet to be done is more to do with the still-rising costs of construction.
Join the discussion: See what’s trending right now on HotCopper, Australia’s largest stock forum, and be part of the conversations that move the markets.