Why the housing boom is different this time

As another round of Saturday auctions loom, you can bet on one more weekend of frenzied reporting about the heat in the housing market.

Auction clearance rates in Sydney have topped 80 per cent for 11 weeks running, a clear signal that buyers are suddenly worried about missing out in a rising house market after years of stagnation. Melbourne clearance rates are holding above 70 per cent and hit 80 per cent late last month.

House prices are playing catch-up after five years of weakness following the financial crisis, fuelled by low interest rates and pent-up demand. Despite much huffing and puffing over a new housing bubble, the level of house prices now is roughly the same as three years ago (A few home truths to quash the hysterics, September 27).

Despite more than 200 basis points of interest rate cuts, housing credit rates are still subdued, with housing finance for new dwellings only up one per cent year-on-year and finance for new home buyers down 10 per cent.

But affordability has improved and confidence levels are showing signs of picking up. Once borrowing picks up – and it will as long as the Reserve Bank keeps rates relatively low – the signs are in place for a new boom for developers, builders and building materials firms alike.

The Housing Industry Association’s construction index this week showed that new orders expanded in September for the first time since April 2010, driven by demand for off-the-plan apartments (which has included buyers from overseas, particularly China).

But the recovery in residential construction – which is still in its early stages – looks very different this time round. Fewer single-dwelling homes are being built and much of the growth is in multi-unit dwellings.

Over the past year, building approvals for multi-unit dwellings have surged by 22.9 per cent, around five times the growth rate for single-family homes of 4.6 per cent, according to recent data. As a result, multi-family dwellings now account for more than 40 per cent of all approvals, compared with an average rate of 30 per cent over the past 30 years.

The trend towards multi-family developments suggests that the recovery won’t look the same for building materials suppliers either, which are generally more exposed to the single-family sector.

The businesses of CSR and Boral are heavily skewed towards freestanding family homes so the impact is being clearly felt on their profitability. Partway into the current housing recovery, they are still losing money.  

Townhouses, units and flats simply require less materials – bricks, timber, roofing and windows – than sprawling, single dwellings on the former dream of the quarter-acre block (the average block size is now 450 square metres for Stockland).

Boral’s reported losses from its Australian building products division were at a cyclical low in the year to June as revenues slid 10 per cent. And yet the company only forecast a narrower loss in the current year for the division, not a return to profitability.

It has taken steps to help return to eventual profit, deciding to close or exit several businesses including a timber mill, an engineered flooring plant and two window fabrication plants. About 800 jobs have been cut since January.

Meanwhile, Fletcher Building’s Australian earnings fell 22 per cent last financial year, and the unit expects minimal growth in the current year.

Another factor that will affect profitability of the building materials companies is the shrinking size of properties, after the welcome fading of the McMansions trend. The average three-bedroom house has shrunk by 25 per cent in internal floor space over the past five years.

So construction activity is likely to peak at lower levels than in the past, and require a more modest use of materials.