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A gloomy outlook for the Australian housing industry for the rest of the 2007 financial year and for 2007-08.

The number of new dwellings commenced Australia-wide fell four per cent to 150,577 in 2005/06 and industry analyst and forecaster, BIS Shrapnel, predicts a further drop of three per cent to 146,400 in 2006/07.

The firm also says it sees a slight dip in the 2007-08 figure but it will be more of a steadying rather than a lurch downwards.

At 146,000 or so, the number of new dwelling starts is around 30,000 less than considered optimal by the housing industry which says Australia now needs more than 175,000 starts a year to meet demand.

The steadying influence in 2007-08 will come from a recovery in starts in Queensland and NSW which will offset the much forecast downturn in Western Australia.

BIS Shrapnel senior project manager and bulletin author, Mr Jason Anderson, said “We are forecasting that national dwelling commencements will hold steady at 145,800 in 2007/08”.

Business forecaster, BIS Shrapnel believes there will be a three per cent drop in the number of dwelling starts across Australia in 2006-07.

According to the April edition of BIS Shrapnel’s Building Industry Prospects bulletin, the level of underlying demand and the national dwelling stock deficiency indicates a larger number of national dwelling commencements are warranted.

The forecast for 2007-08 isn good news for the property and building materials giants supplying the industry.

The likes of Boral, Brickworks, Hansen, Rinker, Alesco Corp and others will all face additional pressure on margins and sales. They have been battling the depressed state of demand now for the best part of two years, so it could be 18 months to two years more of patchy recovery.

“New South Wales and Queensland dwelling commencements will recover in 2007/08, but the affordability millstone is weighing down demand for new dwellings in Western Australia and we expect that market will experience a downturn in 2007/08,” Anderson said.

With housing affordability set to gradually improve in the eastern states, BIS Shrapnel expects the strength of underlying demand will become the key driver of dwelling commencement activity in 2007/08 and beyond.

In particular, substantial pent-up demand for new dwellings in New South Wales and Queensland should mean these states have the best prospects for expansion, according to the Building Industry Prospects bulletin.

Anderson explains this is due to the higher level of underlying demand for new dwellings, which has received a strong boost from net overseas migration. “Australia’s population gain through overseas migration should reach 140,000 persons in 2006/07, which would be the highest annual inflow since 1988/89.

“More than half of this population gain is from long-term visitors, such as students and people on working visas. Long-term visitors are creating a greater level of demand for rental properties, which is reflected in very tight rental markets nationwide.

“The rising population gain through net overseas migration will help push national underlying demand for new dwellings up to 169,400 per annum over the next five years.”

With rental markets tightening, BIS Shrapnel expects rentals will accelerate, which will eventually attract investors back to residential property.

The recent indications are that investor demand in Queensland is rising, due to the combination of price growth and solid rental yields, following strong average rental growth in 2005 and 2006. Investor demand in New South Wales and Victoria remains weak, however, as rental growth has only begun to accelerate in these states.

BIS Shrapnel doesn’t expect that investor financed construction of dwellings will rebound in New South Wales or Victoria until 2008/09.

BIS Shrapnel believes the outlook for Western Australia, however, is quite different to the current prospects in the eastern states.

The problem of housing affordability spread to the west during 2006 and has begun to hinder demand for new dwellings in that state, according to Anderson. As a result, a downturn in dwelling construction in Western Australia is forecast to develop in 2007 and then deepen in 2008.

New South Wales

BIS Shrapnel forecasts dwelling commencements in New South Wales will drop by nine per cent to 29,150 in 2006/07. This would be the first time the number of commencements has fallen below 30,000 since 1958/59. BIS Shrapnel forecasts a rebound of eight per cent for 2007/08, though believes the New South Wales market will remain fundamentally undersupplied.

Victoria

Dwelling commencements fell in Victoria in 2005/06 and BIS Shrapnel forecasts a similar five per cent decline for 2006/07 followed by a further two per cent decline in 2007/08.

Anderson suspects there was some pull-forward of dwelling commencements into 2005 and 2006, associated with the reduction of the First Home Bonus to $3,000 at the start of 2006.

Last year’s interest rate rises have also dampened investor demand for new dwellings, which has resulted in an extended decline in the number of apartment projects, according to BIS Shrapnel.

Overall, BIS Shrapnel expects demand for new detached houses will remain close to flat in 2006/07 and 2007/08.

Queensland

A solid recovery in dwelling construction is underway in Queensland. BIS Shrapnel forecasts dwelling commencements will rise three per cent in 2006/07 and five per cent in 2007/08.

With a very substantial dwelling stock deficiency and reasonable affordability, Anderson predicts demand for new dwellings will recover first in Queensland.

South Australia

Dwelling commencements should be close to steady in South Australia in 2006/07, according to BIS Shrapnel estimates. In 2007/08, Anderson forecasts an eight per cent decrease in total commencements in that

More speculative strength in the Australian dollar can be expected as it trades well over83 US cents after the US dollar hit a two year low against the euro and the yen.

Gold prices hit their highest level in almost a year in New York on the weekend as oil prices rose, commodity prices remained firm and the US dollar and yen slid.

Yet more highs for the Australian dollar overnight and yesterday after another solid jobs report added to suggestions that interest rates will have to go up, a feeling also boosted by the International Monetary Fund in its annual outlook.

The IMF had a lot to say about oil which received widespread publicity butwhat about the outlook for for non-oil commodities?

According to London-based metals consultancy, GFMS, world gold prices could top last year’s 26 year high of $US730 an ounce within the next year because the now usual litany of factors: the weaker greenback,rising geo-political tensions and an investment-led rally.

Despite three interest rate rises in 2006 plus some major tax changes, investors have returned to the housing market in a big way, according to figures from the Australian Bureau of Statistics.

Barrick Gold is the biggest gold miner in the world and it’s testimony to the controversial idea in business that size can be a hindrance rather than help to share market performance.

Funny how China’s trade surplus in March plunged to ‘only’ $US 6.87 billion from the second highest figure on record reached in February of just over $US23 billion.

While there are signs of a rebound in the US economy after the stronger than expected jobs figures for March, the real driver for world metal prices remains China.

But there are signs that country’s economy is not responding to attempts by the authorities to slow activity and that investment and output are continuing to grow at levels well above official forecasts.

That poses the danger that world metal markets are becoming overheating and a sharp fall is around the corner, especially with the likes of nickel up 50 per cent or more this year and copper, up a quarter or more in price in the past month.

We saw this again overnight in New York where copper futures surged to a new five month high.

Traders said that Comex copper futures for May delivery rose 12.9 USc, or 3.8 per cent, to $US 3.506 a pound the highest close for a most-active contract since October19 last year.

Traders said it was a combination of the surprise US jobs figures and continuing demand from China.

The latest price rise means copper prices have jumped26 per cent in the past month and have had continuous weeks of price rises.

Official stocks monitored by the Shanghai Metals Exchange show that reserves of copper almost tripled since reaching a low of 22,731 tons on Nov. 30.

That may change soon because of a rise in expected consumption in the northern spring and summer but it also reflects the rapid surge in demand as prices fell from October onwards and into early January when world metal prices again fell. They rebounded towards the end of January as demand picked up and financial speculators appeared in the market.

Now the sharp rise in price is seeing importers starting to cutback, according to trade reports in China and London, with imports being delayed to allow Chinese internal prices catch up to world prices which surge weekly.

Official figures show that China’s imports of refined copper and alloys in February rose 12 per cent from January’s level but aluminum stockpiles fell for a fourth week in a row last week.

Chinese authorities late last week lifted the reserve requirement for a sixth time in a year last week to 10.5 per cent to try and rein in investment loans, and advances to stockmarket players and property developers. Official interest rates have risen four times but the currency remains tightly controlled.

This acceleration in demand from China has seen base metal prices surpass the cyclical high made in May last year and here in Australia it has seen the $A move up towards its December 1996 high of $US0.8214.

The AMP’s head of strategy, Dr Shane Oliver says further gains in the $A are likely, possibly up to its February 1989 high of $US0.8950.

“The strength in both commodity prices and the highly cyclical Australian dollar is telling us that, notwithstanding the risks hanging over the US economy, the global growth outlook remains pretty good.

“The rebound in commodity prices is great news for resources stocks because it means that profit estimates will need to be upgraded.

“It also means that the Australian Government’s tax revenues will continue to surprise on the upside leading to the possibility of ongoing tax cuts.”

Pushed by that buying from China, world metal prices rose nicely last week thanks to a mixture of concern about supplies of copper, lead, nickel and tin met strong buying from China.

As a result some metals to record levels and traders said there has been a 180 degree shift in sentiment from the concerns at the start of 2007 about slowing consumption and rising mine output.

Copper reached a five-month high when it touched $US 7,510 a tonne on the London Metal Exchange last Thursday, ahead of the Easter break.

The LME said the three-month copper price rose more than 9 per cent last week thanks to a 17 per cent surge in Chinese copper imports in January and February.

Nickel prices again hit new highs with the three-month price moved reaching a peak last week of $US49,875 a tonne, up 9 per cent for the week, and a huge 50 per cent so far this year. Nickel prices hit $US51,000 a tonne in after hours trading in London.

Boring lead moved to new peaks last week when it hit $US2,028 a tonne up 5 per cent over the shortened week’s trading.

Driving lead is supply problems, including the shutting of the Magellan metals operation near Esperance in Western Australia because of bad pollution problems in the town apparently caused by trucked loans of lead carbonate being blown across the port (the lead is mined inland and exported through Esperance). Lead stocks, like stocks of so many other metals, have been falling recently.

Gold prices also rose last week but fell Monday in New York to cklose at $US676.90 an ounce.

Last month when we looked at the investments and other activities of Warren Buffett’s Berkshire Hathaway, there were two unidentified holdings in which the company was building a position.

The list was of investments with a market value greater than $US700 million.

He told shareholders in his letter the two exceptions had a combined market value of $US1.9 billion but he didn’t disclose their names “because we continue to buy them. I could of course, tell you their names. But then I would have to kill you.”

Late last week Berkshire revealed it had built a 10.9 per cent stake in that most unfashionable of companies, the huge Burlington Northern Sante Fe railway and transport company (BNI) which now had a market value of $US 3.2 billion.

Berkshire says it now owns 39 million shares of the second-largest US railroad as of April 5.

The deal has surprised analysts who point out that the US railroad industry is fully priced at the moment with good operating margins and high valuations by investors.

Buffett’s stock purchases make him the largest shareholder, ahead of Marsico Capital Management LLC, which owned 32 million shares for an 8.9 percent stake in December.

US brokers said Berkshire would have had to disclose the rail stake upon exceeding a 5 per cent threshold if Buffett was purchasing the Burlington Northern shares with the intent of making a takeover bid, seeking a board seat, or otherwise influencing management.

But passive investors can wait until the end of the year to report 5 per cent holdings, but investors do have to file with the SEC within 10 days of reaching or exceeding a 10 per cent stake.

According to the filing, Buffett paid $US81.18 to $US81.80 in three transactions on April 4 and April 5. Burlington Northern closed at $US 82.72, on April 5.

Burlington Northern has more than 51 thousand kilometres of track in the US, shifting millions of tonnes a year of coal, grain and general freight. It is the second largest US rail group behind Union Pacific Corp.

In its 2006 annual report Berkshire listed its five-largest holdings as USG Corp, Washington Post Co, Moody’s Corp, White Mountains Insurance Group Ltd. and American Express Co.

As expected the punters hopped into Coles shares yesterday, whipping them up to a day’s high of $17.08 before they settled back at a new record close of $16.86, 39c above the $16.47 offer price from Wesfarmers and its partners.

Yes Australia had yet another trade deficit in February.

Good news and not so good news from North Asia for Australian exporters this week.

Steady as we go: it was an each way bet, but you wouldn’t have heard that phrase around the Reserve Bank board table in Sydney yesterday.

Inflation up according to the TD Securities/ Melbourne Institute inflation gauge and normally that’s means more ‘upward pressure on interest rates’ headlines.

If you had to find a single reason why interest rates are going to rise, look at this graph from the Reserve Bank.