Morningstar - Q1 2021 - 25

in the years to come. However, investors should be
concerned about the quality of the issues and
alert to the risks of so-called greenwashing that
can lead to the funding of inappropriate projects.
Selectivity and transparency will help ensure
that only the most relevant and impactful green
projects receive the necessary funding.

Starting Back Up The stage is set for a housing commencements recovery.
Commencements
Detached Houses

Higher Density

Total

Seasonally Adjusted Annualized Rate
250,000

PROJECTION

203,740 200,000

Valerio Baselli is a senior editor at Morningstar Italy.

150,000
121,113
82,627

Here Comes the
Housing Recovery

100,000
50,000
0

Q1 2010

Q1 2015

Q1 2020

Q1 2025

Q4 2030

Source: Morningstar estimates, Australian Bureau of Statistics, Reserve Bank of Australia, Real Estate Institute of Australia.

AUSTRALIA + NEW ZEALAND

Australia
As we peer into early 2021, a much-anticipated
cyclical recovery in Australian residential
construction is underway. With dwelling
investment typically leading the business cycle,
we'd anticipated that a swift turnaround in home
construction would contribute to broader
economic recovery in 2021. However, key leading
indicators for new-home construction
turned positive in the third quarter, ahead of
our prior expectations.
Swift action by the Australian government to
support the residential construction sector
prevented a collapse in new housing demand. At
the outset of the COVID-19 shock, we expected
the government's efforts to support construction
to have a relatively muted effect, given the
severity of the economic impact that lockdown
measures were expected to have on the Australian
economy. We believed that the expansionary
monetary policy enacted by the Reserve Bank
of Australia would drive the recovery in residential
construction. Given that it typically takes up
to three quarters for monetary easing to stimulate
building approvals for detached houses and
alterations and addition projects, and even longer
for higher-density dwellings, we had anticipated a
mid-2021 recovery in housing commencements.
However, the recovery has arrived well in advance
of this schedule. Building approvals-which

lead housing commencements typically by one
quarter-turned sharply positive in the third
quarter. The rebound in building approvals
was broad-based, tracking a significant 13% ahead
of our full-year expectations. Detached
housing and alteration and addition approvals
were particularly strong.
The rapid rebound is directly attributable to
the government's comprehensive suite of fiscal
support, including the HomeBuilder program,
which provides grants to eligible homeowners to
build a new home or substantially renovate
an existing one. The stimulus has been effective
in expediting the revival of the residential
construction sector; housing commencements
were on track to enter a cyclical recovery in the
fourth quarter of 2020, ahead of our expectations
for an early to mid-2021 inflection point.
Accordingly, we lifted our full-year dwelling
investment forecast-which includes investment
in new detached and higher-density
housing and alterations of and additions to the
existing housing stock-by approximately
3% to AUD 95.6 billion.
We expect the positive impact of fiscal stimulus
on housing commencements and alterations
and additions activity will taper off during 2021.
Nonetheless, we do not expect the withdrawal of
government support to stymie the nascent
recovery in home construction. Rather, ultra-

accommodative monetary policy settings and
existing-house prices-which have begun rising
once more in late 2020-will continue to
support the recovery in 2021. Our long-term
expectations for Australian housing remain largely
unchanged. That is, we continue to expect an
approximate 200,000 housing commencements at
midcycle, underpinned by Australia's growing
population over the coming decade.
The pandemic's impact on existing-house prices
was also more muted-and shorter-lived-
than we'd originally anticipated. Key to the relative
resilience of house prices throughout 2020 has
been the rental property market, which held up
better than expected despite rising unemployment
and the closure of international borders.
Substantial slack still exists in the rental market,
with vacancies above the market's natural rate of
2.4%. We expect the rental vacancy rate to
provide a modest headwind to 2021 house-price
growth. We expect new household formation
to return to more normal levels in late 2021, when
borders start to reopen.
We forecast nominal house-price growth of
approximately 4% in 2021. Nonetheless,
with our long-term expectations for Australian
housing unchanged, the modest upgrade to our
2021 forecast has an immaterial impact on fair
value estimates for housing-exposed stocks
under our coverage. While the sector remains set

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Morningstar - Q1 2021

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