Sydney’s construction sector has entered an extended recovery period. Activity has been weak since 2003, due to a slump in demand for new housing. A weak state economy has limited the growth in business activity and government revenues, which are reflected in the static levels of non-residential building and civil works.
A tight rental market has led to strong growth in rentals, and is now contributing to solid property price growth in most of Sydney. There has been a rebound in apartment development, principally in the inner city. Population growth is being led by overseas migration, with young office workers and international students leading a strong wave in demand.
Most recently, demand for new homes in the western fringe have begun to show strong growth, with south-west Sydney now catching up after lagging behind the north-west for many years. Our view is that the return of greenfield buyers reflects the rise in established house prices and a greater offering of small lot product, which tend to be economic drivers and not consumer preferences.
Notably, there has not been a rebound in turnover of established houses (yet), which tends to generate more upgrader demand for new houses. Greater turnover is likely to develop during the second half of 2013 and through 2014, which would move the demand for new houses back to the levels observed during the late 1990s.
Detached house approvals, south-west Sydney
Note: includes Liverpool, Camden, Campbelltown and Wollondilly LGAs
Source: ABS, MacroPlan
The residential building recovery will be a key positive force for the Sydney economy. However, we are not factoring in a widespread upturn in commercial building, through the office or retail sectors. If we exclude overseas students, growth in the workforce age population was just 1.0% over the past three years, and will slow further due to an ageing demographic. New shopping centres are giving way to major warehouse & logistics projects, as greater industrial space is used to directly service retail trade via internet shopping.
There are some obvious major commercial projects on the horizon, as Barangaroo carries the construction cycle forward from 2016. Development of this precinct will overlap with construction of the north-west rail link, the Moorebank intermodal terminal and potential light rail works. This combination of projects will have broader effects on the city’s commercial and industrial development pipeline.
Aggregate NSW construction activity, forecast to 2015/16
Source: ABS, MacroPlan
An extended recovery in construction activity will have greater feedback on regions where residents are directly employed in this sector. South-west Sydney will be the primary beneficiary. Construction sector employees form a relatively high proportion of the workforce in south-west Sydney.
Employment by occupation, selected LGAs and Sydney total
Source: ABS Census 2011, MacroPlan
Over the next few years, we expect that south-west Sydney will be one of the fastest growing regional economies across Australia. This outcome would reflect national growth transitioning away from the mining sector and back to housing construction.
If you would like more information about this article please contact Jason Anderson, Chief Economist on 02 9221 5211 or via email.