Beware the building boom

An unprecedented building boom is underway in Australia but, as Gaurav Sodhi explains, this time...

Australia is in the middle of a construction boom. Over the past six months, more than 100,000 new dwellings have been approved, taking the annual run rate to about 220,000 new dwellings. That’s the fastest pace of home construction in twenty years.

Yet peer a little closer into the data and it’s clear that there are two distinct construction markets in Australia: high rise apartments and freestanding houses.

Despite soaring property prices, detached housing construction has been flat or falling for a decade. Over the past two years that trend has reversed and detached housing construction is now slightly above the long term average. Most commentators expect above average construction to continue for years as the industry catches up to a decade of pent up demand.

That could certainly still happen but the second construction market could yet undermine the first. An unprecedented boom in apartment construction, particularly in Sydney and Melbourne, suggests past housing patterns have changed.

Twenty years ago, when we last saw activity at these levels, high rises made up just 10% of total construction in NSW: today it is 40%. In Victoria, high rise construction has risen from 5% of new dwellings to 25% over the same time. These are profound shifts in the way we live and are unlikely to be reversed.

This has important implications for the building and construction industry. Ten or twenty years ago, a building boom meant a bonanza for maker of bricks, tiles and pavers. Although the market is strong for such items, peak demand isn’t as strong as it was. High rise construction is less material intensive than detached housing. Businesses like Boral (ASX:BLD), Brickworks (ASX:BKW), CSR (ASX:CSR) and James Hardie (ASX:JHX) are benefiting from the boom but not as much as in the past.

Investors looking at aggregated construction data and making top down decisions about where to put their money need to be careful. There is a construction boom on today, but it’s not as lucrative as it once was. 

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