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The number of dwellings that started construction over the June quarter this year was 13% below the decade average, while national population growth in March was 49% higher than the decade average.

The Australian Bureau of Statistics released building activity data this week, showing the total number of dwelling commencements fell by 11.4% over the year to June 2012. Based on the June data, the number of housing starts was13.4% lower than the ten year average. The weak results highlight just how weak the housing construction sector has been since building activity started to fall in early 2010.

The weakest sector for housing construction has been detached houses. Builders started construction on 20,786 houses over the June quarter of 2012 (seasonally adjusted), a level which is about 21% lower than the decade average of 26,189 starts. In contrast, unit commencements were tracking almost 3% higher than the ten year average over the June quarter despite a recent slowdown from a historic high.

Victoria, where new home building has significantly led the nation since 2008, has shown a sharp slowdown in housing construction. Between the beginning of 2008 and the end of March 2012, Victoria accounted for one third of Australia’s housing starts; this is despite Victoria’s population growth (ie housing demand) comprising a lower 25% of the nations overall population increase. The number of dwelling starts have fallen by 18.4% between June 2011 and June 2012, however, housing construction in Victoria remains 6% higher than the decade average.

Over the 2011/12 financial year, 60% of Victoria’s housing starts were for detached houses while the remaining 40% of dwelling starts fell into the ‘other’ category, which is predominantly characterised as unit dwellings. Prior to 2008 the proportion of housing starts for houses averaged around 75%. The difference in the proportion of dwelling commencements for houses and ‘other’ dwellings more recently can be most likely be attributed to a surge in inner city unit development.

Victoria’s surge in dwelling commencements began during the June quarter of 2009, with the trend in housing construction breaking ranks with the other major states at this time. New South Wales and Queensland also saw a sharp increase in dwelling construction at this time, but no where near the magnitude of what was recorded in Victoria. Even a year earlier it can be seen that the Victorian trend was quite different, with dwelling construction holding firm during the GFC while home building across the other major states fell away.

An interesting observation is that Victoria’s dwelling construction has been much more responsive to the housing market cycle rather than what has traditionally been viewed as the key determinant of housing demand (ie. population growth). The surge in home building came at a time when Victorian and national population growth was consolidating. Victorian population growth reached a recent peak in March 2009 with 31,089 new residents over the quarter. By June 2010, Victorian population growth had fallen by just over 66%, while at the same time housing starts increased by 50%. Conversely, now that population growth is once again ramping up, creating additional demand for housing, Victorian housing starts are winding back.

The rate of home construction in Victoria has raised the spectre of housing over supply, however that may not be the case. In their June 2012 ‘Housing Supply and Affordability – Key Indicators, 2012’ publication (released June 2012), the National Housing Supply Council, which operates out of the Federal Treasury, shows at the time of publication Victoria’s housing market remained undersupplied to the tune of about 10,000 dwellings. The findings showed the level of Victorian housing undersupply had narrowed significantly since 2009, however, overall there is still a cumulative shortfall in Victorian housing due to the under building of previous years. It’s important to note that the National Housing Supply Council research into housing supply is currently factoring in new census data and it will be interesting to see if their updated analysis will show a similar outcome to the June report.