Despite record demand for homes, the latest ABS construction data shows the pipeline of new homes continues to slow, with building starts down 16.4 per cent compared to last year.
In the first quarter of 2023, there were 26,265 new houses commenced, which is 39.1 per cent lower than during the peak in 2021.
HIA Senior Economist, Tom Devitt said the decline in detached housing commencements is part of the ongoing cooling of the market that is expected to continue well into next year.
“New home sales have declined sharply since the RBA started increasing interest rates last May,” Mr Devitt said.
“This is compounding the high volume of earlier projects that are being cancelled across the nation as home buyers struggle to secure finance in the face of ballooning home building and finance costs.
“This produced the first quarter in almost three years that Australia has completed more houses in a three-month period than it has commenced.
“Unfortunately, this was driven by the decline in commencements, not a pickup in completions.”
According to Mr Devitt, there were only 28,094 detached houses completed in the first quarter of 2023 – 9.6 per cent fewer than in the same quarter last year.
“Ongoing labour constraints continue to make it very difficult for builders to complete the significant volume of work taken on during the pandemic,” he said.
“There remains almost 104,000 houses under construction in the first quarter of 2023. This has been a broadly stable volume over the last 18 months and almost double the 57,500 that were under construction heading into 2020.”
Mr Devitt said costs and supply uncertainties were also holding back the multi-units sector, with just 19,981 multi-units started in the first quarter of 2023, well down from the 25-30,000 during the 2015-2018 apartment boom.
Costs starting to ease
In some good news for the construction industry, new data from CoreLogic shows rising building costs are slowing down.
CoreLogic’s Cordell Construction Cost Index (CCCI), which tracks the cost to build a typical new home, showed prices increased 0.7 per cent for the June quarter – the lowest rate since September 2020 and well below the 1.2 per cent decade average.
On an annual basis, the national CCCI increased by 8.4 per cent.
CoreLogic Construction Cost Estimation Manager John Bennett said while the national annual growth rate remained high, it was an improvement on last year’s 11.9 per cent, which was the largest annual index rise on record, excluding the impact from the introduction of the GST in 2000.
“While the annual growth figure remains high it’s the lowest level it’s been since the 12 months to December 2021,” Mr Bennett said.
“The latest index figures will bring some comfort and reassurance to the beleaguered building and construction industry as we’ve seen two consecutive quarters of growth more in line with long-term averages.”
Mr Bennett said slowing housing starts has helped ease some of the pricing pressures.
“There’s been a significant drop off in dwelling approvals in the year to April, which will flow through to prices,” he said.
“As the level of residential construction work reduces pressure on material costs and labour supply is likely to reduce further.”
It was a similar story for construction costs in New Zealand, with falling home prices and fewer starts contributing to downward pressure on costs.
CoreLogic found construction costs in New Zealand rose 0.6 per cent in the June quarter, in line with the March figures, but well below the average quarterly increases of 2 per cent recorded in 2021 and 2022.
The annual rate of change in the CCCI has also slowed to 6.4 per cent, still above the decade average of around 4.5 per cent, but a significant improvement from the peak of 10.4 per cent recorded in late 2022.
CoreLogic Chief Property Economist Kelvin Davidson said although we’re also seeing the actual volume of building work start to drop, the construction industry is still busy as it works through the pipeline of previously-approved consents.
“The widely-anticipated slowdown in consents has alleviated some pressure on the construction materials supply chain in recent months while also slightly reduced workloads for builders, which means that the growth in costs isn’t as intense as it was in 2022,” Mr Davidson said.
Mr Davidson said the number of new dwelling consents was likely to fall further and that as the pipeline of construction came to completion, workloads would also continue to moderate over the next two to three years.
He said the ease in demand and opening on capacity for builders would restrain construction costs, however, he said the impact of migration flows on labour supply was a trend that would need to be watched closely.
“The expectation is the quarterly rate of change in the CCCI will continue to grow around 0.5 per cent for the rest of 2023, taking the annual change to less than 3 per cent by the end of the year,” he said.
“That’s not going to mean the cost to build a new home is going to be cheaper, but it does provide some reassurance to buyers that costs won’t increase at the same rapid rate we’ve experienced in the past two years.”