Australia is in the early stages of a strong upswing in housing construction activity.
Deloitte Access Economics forecasts dwelling investment to grow nationally by a robust 6.5% per annum over the next five years. New South Wales construction is already growing strongly and is forecast to grow 7.5% p.a. after 9.0% growth in 2012/13, while Queensland (11.1% p.a.) and Western Australia (10.1% p.a.) are forecast to bounce back strongly over the next five years after recent subdued construction. The major exception is Victoria, which is forecast to see only 1.4% p.a. growth over the next five years after much stronger growth than other states over the past five years.
With housing pivotal to Australia’s expected domestic economic recovery in coming years, it seems an appropriate time to think about what impact this will have on commercial property markets.
Firstly, it is important to delineate the direct and indirect economic impacts of housing activity. The direct impact on GDP growth that comes from housing construction boosting investment is potentially the smaller of the two – housing investment historically is typically around 5.6% of total GDP, so the strong growth forecast over the next five years will add around 0.3 percentage points to GDP growth per annum.
This is likely to be overshadowed by the harder to estimate indirect impact on private consumption (which is typically 53% of GDP). This consumption impact comes via households furnishing new housing, plus a ‘wealth effect’ that exists when households feel more confident to consume as asset values rise. This wealth effect of housing is particularly strong in Australia because most financial assets investments Australians make are in superannuation accounts not accessible until retirement and because housing investment has been historically popular due to tax incentives.
For retail and industrial property markets, the benefits of strong housing activity appear fairly clear. The lift in consumption expected will generally boost demand in both sectors, while the industrial sector will also benefit slightly from increased demand for building material manufacturing and distribution. Retailing and warehousing demand for household goods in particular are likely to generate much stronger levels of demand, following an extended period when this more discretionary retail category has been weak and volatile.
For the office market, the benefits are less obvious. However, the table below shows that employment in most industries, particularly white-collar industries, is highly correlated with housing investment. While this correlation does not imply causation, it does lend support to the strength of the indirect impacts of housing activity and suggests that strong housing markets go hand-in-hand with strong employment growth. The slightly lower correlation of finance and insurance employment reflects the global exposure of this sector, but a domestic housing recovery is certainly likely to boost credit growth and employment in this significant driver of office market demand.
A housing-led recovery is one that will eventually ‘lift all boats’ and benefit property demand in all sectors. For office market demand this is likely to mean a very broad and ‘bottom-up’ recovery in leasing demand that may be hard to notice initially due to its organic nature, but we can have faith that will happen.
Leigh Warner is a Director of Research for Jones Lang LaSalle, Based in Brisbane, Australia.