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VICTORIAN ECONOMIC REPORT
April 2019
1
VICTORIAN
ECONOMIC REPORT April 2019
VICTORIAN ECONOMIC REPORT
April 2019
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SUMMARY • At 2.2%, population growth in Victoria is still the fastest in Australia
• The strong labour market is attracting large volumes of inward migration to the state.
• Data for March 2019 indicate that the unemployment rate dropped to 4.6% - below the national average.
• Over the year to March 2019, total employment increased by 122,700 across Victoria (+3.8%). The profile of job creation was very strong, with 124,800 full-time jobs being generated.
• New home building activity in Victoria reached record levels in recent times with new dwelling starts hitting an all-time high of 76,270 in 2017/18.
• New dwelling approvals in the state had peaked at over 76,000 in the year to June 2018. Latest data indicate that the annual total has since fallen by 13.6% and is likely to move lower.
• Over the most recent 12 months for which we have figures, apartment/unit approvals have fallen by 23.5%.
• In contrast, the pipeline of new detached house building has actually expanded by 5.1% over the same period.
• The number of owner occupier loans for the construction of new dwellings totalled 21,300 over the year to February 2019 – only 2.4% down on a year earlier.
• The number of owner occupier loans for the purchase of new homes totalled 9,395 in Victoria over the 12 months to February 2019, a reduction of 15.4% on a year earlier.
• The FHB share of total owner occupier home loans has soared since mid-2017 with the share rising from 22.3% in 2016/17 to 28.7% in the 12 months to February 2019.
• The number of FHB loans reached 33,990 in the year to February 2019, 3.3% higher than a year earlier.
• In the year to February 2019, the value of housing investor loans in Victoria totalled $18.48 billion. This was some 22.8% lower than a year earlier.
• During 2018, non-residential building work totalled $12.79 billion and was 9.6% larger in volume compared with a year earlier.
• Engineering construction work in Victoria grew by 30.5% in 2018 to reach $17.18 billion.
VICTORIAN ECONOMIC REPORT
April 2019
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POPULATION • Latest figures indicate that Victoria had Australia’s fastest growing population with an increase of 2.2% over
the year to September 2018 – an increase of 139,700.
• Over the same period, Australia’s population grew by 1.6% adding 395,100 residents.
• The rate of population growth has actually decelerated slightly in Victoria over the last couple of years.
• At the end of September 2018, Victoria’s population was estimated at 6.50 million.
• Population growth, particularly in adult age groups, is a crucial driver of demand for new home building activity as well as the construction of schools, health facilities, offices, workplaces, retail projects and other types of buildings.
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Annual Rate of Population Growth in Victoria (%), 2008 to 2018
VICTORIAN ECONOMIC REPORT
April 2019
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• As the chart below shows, inward migration is the main driver of population growth in Victoria.
• In the year to September 2018, net inward migration to the state totalled about 98,810, the vast majority of which was from overseas (+84,825).
• Natural increase added 40,865 to Victoria’s population over the same period and tends to be a much more stable component of growth compared with migration.
• As we shall see below, population growth in Victoria is strongly dependent on the health of the state economy.
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Components of Annual Population Growth in Victoria (Thousands), 2008 to 2018
Natural Increase Overseas Migration Interstate Migration
VICTORIAN ECONOMIC REPORT
April 2019
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LABOUR MARKET CONDITIONS • Having come close to 7% earlier in the decade, the unemployment rate in Victoria has seen sustained decline
over the past five years.
• Latest data for March 2019 indicate that Victoria’s unemployment rate fell to 4.6% compared with 5.2% a year earlier – and is below the national average (5.0%).
• The labour force participation rate in Victoria is 66.0%, a little higher than a year ago (65.6%).
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Unemployment Rate in Victoria, 2009 to 2019
VICTORIAN ECONOMIC REPORT
April 2019
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• The sustained reduction in Victoria’s unemployment rate over the past five years has been driven by a robust rate of job creation across the state.
• The jobs boom owes its existence to the big improvement in the state’s economic competitiveness arising from the recovery in the global economy and the depreciation of the Australian dollar’s exchange rate since 2015. This has made Victoria, and the rest of Australia, a less expensive place to invest in and to trade from.
• Over the year to March 2019, total employment increased by 122,700 across Victoria (+3.8%). The profile of job creation was very strong, with 124,800 full-time jobs being generated. The number of part-time jobs actually fell as workers transitioned from part-time to full-time employment.
• The very favourable conditions in Victoria’s labour market is one of the main reasons why inward migration to the state is from jobseekers is so strong. This is the mechanism through which the state of the economy and the pace of population growth in Victoria are linked.
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Annual Change in Employment in Victoria (thousands), 2009 to 2019
Total Employment Full-time Employment
VICTORIAN ECONOMIC REPORT
April 2019
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NEW HOME BUILDING ACTIVITY • Population growth, house price changes and interest rates are the high level drivers of new home building
activity in Victoria.
• As the chart below shows, new home building activity reached record levels in recent times with new dwelling starts hitting an all-time high of 76,270 in 2017/18.
• The strong upturn in building was heavily influenced by activity on the apartment and high density side of the home building market.
• Apartment/unit starts briefly outnumbered detached house commencements during 2014/15.
• Detached house building activity generally tends to be less volatile than apartment activity.
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Number of New Home Starts by Dwelling Type in Victoria (Moving Annual Total), 1999 to 2018
Detached Houses Apartments/Units
VICTORIAN ECONOMIC REPORT
April 2019
8
• Whereas the above chart dealt with new dwelling starts, the chart below illustrates approvals for new homes and acts as a guide to the upcoming pipeline of new home building work.
• There has been quite an abrupt reversal in the volume of new dwelling approvals in Victoria over the past year.
• New dwelling approvals in the state had peaked at over 76,000 in the year to June 2018. Latest data indicate that the annual total has since fallen by 13.6% and is likely to move lower.
• This means that the inflow of new work to Victoria’s home building sector is shrinking and that the amount of work being done on the ground will move backwards as outstanding jobs are completed.
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Total Volume of New Dwelling Approvals in Victoria (Moving Annual Total), 2014 to 2019
VICTORIAN ECONOMIC REPORT
April 2019
9
• The chart below breaks new home building approvals down between detached houses and apartments/units.
• It is clear that the fall off in approvals has been almost exclusively concentrated in the high density section of Victoria’s housing market – the vast bulk of which is in Melbourne.
• Over the most recent 12 months for which we have figures, apartment/unit approvals have fallen by 23.5%.
• In contrast, the pipeline of new detached house building has actually expanded by 5.1% over the same period.
• The particular weakness of new apartment approvals is a result of the sharp fall of in demand from foreign buyers and domestic investors, buyer segments which tend to favour high density product.
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Number of New Dwelling Approvals by Type in Victoria (Moving Annual Total), 2014 to 2019
Detached Houses Apartments/Units
VICTORIAN ECONOMIC REPORT
April 2019
10
• In light of declining new home building activity in Victoria, it is not surprising that the volume of loans for new homes has followed suit.
• The chart below summarises the development of owner occupier lending for the construction and purchase of newly-built dwellings.
• The number of owner occupier loans for the construction of new dwellings totalled 21,300 over the year to February 2019 – only 2.4% down on a year earlier.
• The number of owner occupier loans for the purchase of new homes totalled 9,395 in Victoria over the 12 months to February 2019, a reduction of 15.4% on a year earlier.
• As the pool of new homes being completed shrinks, the number of new home purchase loans will continue to drop.
• The impact of tighter credit conditions will also have an impact on lending activity here.
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Construction and New Home Purchase Loans in Victoria (Moving Annual Total), 2014 to 2019
Construction Loans New Dwelling Purchase Loans
VICTORIAN ECONOMIC REPORT
April 2019
11
• There has also been a marked change of direction of the volume of established home transactions in Victoria.
• The chart below captures the volume of owner occupier loans for established home purchase in Victoria. Over the year to February 2019, the number of such loans totalled 87,790 which was 9.1% lower than a year earlier.
• House prices in Melbourne have fallen by about 15% since mid-2017 and this has made both buyers and sellers more hesitant about engaging in housing market transactions.
• As with new home loans, the post-Royal Commission credit squeeze has also impeded activity in the market for established homes.
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Number of Loans for Established Home Purchases in Victoria (Moving Annual Total), 2014 to 2019
VICTORIAN ECONOMIC REPORT
April 2019
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• The First Home Buyer (FHB) market segment is one of the few to have improved its position in the Victoria housing market over the last couple of years.
• As the chart below shows, the FHB share of total owner occupier home loans has soared since mid-2017 with the share rising from 22.3% in 2016/17 to 28.7% in the 12 months to February 2019.
• There are a number of reasons for this. Enhanced FHB incentives were brought in by the Victorian state government in mid-2017 which included a $20,000 grant for FHBs in regional Victoria as well as a more favourable stamp duty regime.
• The reduction in house prices in Melbourne has also acted as an incentive for some homebuyers to enter the market for the first time.
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First Home Buyer Share of Owner Occupier Loans in Victoria (Moving Annual Total), 2014 to 2019
VICTORIAN ECONOMIC REPORT
April 2019
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• Even though the FHB market share has seen a strong rebound over the past two years, it has not been large enough to offset the considerable decline in owner occupier loans to non-FHBs.
• The number of non-FHB owner occupier loans totalled 84,270 over the year to February 2019, a reduction of some 12.6% on a year earlier.
• The number of FHB loans reached 33,990 in the year to February 2019, 3.3% higher than a year earlier.
• As the chart below shows, there is some evidence that FHB demand in Victoria has also started to cool over the past six months or so.
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Number of First Home Buyer Loans in Victoria (Moving Annual Total), 2014 to 2019
FHB Loans Non-FHB Loans
VICTORIAN ECONOMIC REPORT
April 2019
14
• As discussed above, the most dramatic decline in the housing market relates to investor transactions.
• There are no official figures on the actual volume of investor loans. Instead, the chart below captures the value of new loans to households for housing investment.
• In the year to February 2019, the value of housing investor loans in Victoria totalled $18.48 billion. This was some 22.8% lower than a year earlier.
• Lending to investors in Victoria actually peaked at $24.99 billion over the year to September 2017 and is since down by 26.0%.
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Total Value of Loans to Housing Investors in Victoria ($m) (Moving Annual Total), 2014 to 2019
VICTORIAN ECONOMIC REPORT
April 2019
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• The chart below summarises the changes in investor lending in Victoria over the past 5 years.
• There had been a dip in lending to Victoria’s housing investors in 2015/16 as a result of APRA’s cap on investor loans – and the value of loans had fallen by 20% at one stage.
• Compared with owner occupiers, investor demand is much more sensitive to market conditions.
• While not captured in the lending figures above, foreign buyers were central pillar of demand for new homes in Victoria for a time earlier in the decade.
• The imposition in 2016 of a severe stamp duty surcharge of 7% on foreign buyers by Victoria’s government has resulted in demand from this source falling sharply – and contributed to the major reduction in apartment building.
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Percentage Change in Loans to Housing Investors in Victoria (Moving Annual Total), 2014 to 2019
VICTORIAN ECONOMIC REPORT
April 2019
16
• Whereas residential building faces short term difficulties, the other sections of Victoria’s construction industry are faring better.
• A strong pipeline of government transport infrastructure work along with the demand dividend arising from strong and sustained population growth boosted non-residential activity during 2018.
• During 2018, non-residential building work totalled $12.79 billion and was 9.6% larger in volume compared with a year earlier.
• Engineering construction work in Victoria grew by 30.5% in 2018 to reach $17.18 billion.
• In total, the value of construction work done in Victoria during 2018 was $54.48 billion which represented a very healthy increase of 15.1% on the previous year.
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Value of Construction Work Done in Victoria (Constant Prices), 2009 to 2018
Non-Residential Building Engineering Construction