Overseas investors have slowed, through a range of taxes and other changes, domestic investors have been deprived of access to finance, and owner-occupiers too are having difficulty getting the home loans they need. The credit squeeze has taken a huge number of would-be buyers out of the housing market and prices have adjusted accordingly. There is little question that the softening in home prices in Melbourne has caused a shift in sentiment. This represents a significant risk for the state’s home-building industry. Given that residential building has been a key contributor to the state’s strong economic growth in recent years, a downturn in building represents a broader economic risk. Loading

The growth in construction activity over recent years has seen strong growth in the state’s construction workforce. More than one in 10 workers in Victoria are now directly engaged in construction. The jobs of many workers in other sectors, such as manufacturing, services, retail and wholesale trade, are dependent on the demand generated by construction. The good news is that there is still a lot of residential building work under way. At the end of June, there were 73,500 dwellings under construction which is an all-time high for the state. This will sustain a relatively solid level of building activity in the near term but there are growing concerns about the outlook for 2019. Leading indicators of home building are already showing signs of weakness.

Lending for new homes in the September quarter was down by 9 per cent on the levels a year ago and approvals are down 5 per cent. Reports from people on the ground suggest that numbers in the final quarter of 2018 are likely to be softer still. HIA’s forecasts suggest Victoria is likely to see a 19 per cent drop in new home starts this financial year. It is a substantial fall, but given it is a decline from an all-time high it still provides for a healthy level of home building. However, there are a number of risks that could see activity fall even further. The risks stem from two issues: whether the credit squeeze proves ongoing (a distinct possibility with the banking royal commission set to report early next year), and whether we see further disruption arising from changes in key policy areas following the state and federal elections (for example, cuts to immigration or tax hikes via changes to negative gearing and capital gains tax).

While it pays to be aware of the risks, we shouldn’t overlook the fact that aside from softening in the housing market the state’s economy is in very good shape. Official figures show the Victoria’s economy grew by 3.5 per cent last year. The labour market is very strong with the unemployment rate at the lowest level since 2011, jobs are being created and there are finally signs that wage growth is improving. The population continues to grow at a healthy rate, although we have seen the number of migrants from interstate and overseas ease over the past 18 months. Victoria's vibrant economy is underpinning the state’s housing market, and a stable housing market has significant benefits for the community and the economy. Policymakers and regulatory authorities need to be very cautious about any further changes and the banks need to continue with their core business of lending.

Fiona Nield is Victorian executive director of the Housing Industry Association.