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Housing market: lots of pain, not much gain

While the backlog of residential construction projects are being worked through, problems within the construction industry may hinder the pace of recovery.

The housing crisis continues to be a significant challenge for the Australian economy. The imbalance between housing demand and supply has driven up the cost of buying or renting a property, while higher interest rates have seen mortgage repayments soar. As a result, the majority of Australians have been impacted by the increased cost of housing over the past few years.

In the rental market, conditions remain tight. Vacancy rates have slightly improved, rising from 1.1% in January to 1.3% by August, but are still well below pre-pandemic levels. Meanwhile, national dwelling values continue to rise despite elevated interest rates and cost-of-living pressures, though the pace of growth is slowing. CoreLogic’s Home Value Index increased by 1.0% in the September quarter, the softest quarterly increase since March 2023. According to CoreLogic, the growth rate is slowing as more homeowners look to sell. 

Rising rents have encouraged property investment, with the value of new housing loans to investors (excluding refinancing) increasing by more than 34% over the past 12 months. This surge in investor activity has been focused on established properties, with dwelling construction remaining weak.

Indeed, despite elevated population growth and a reduction in average household size adding to underlying demand, the core issue driving the housing crisis continues to be the lacklustre pace of construction activity. Building approvals data for August showed that total dwelling approvals fell by 6.1% in the month to be just 3.6% higher over the year. Meanwhile, the latest building activity data shows dwelling completions rose by 9.2% in the year to June 2024, and 7.3% in the June quarter alone. The number of dwellings under construction is still significantly above pre-pandemic levels, but problems within the construction industry may hinder the pace of recovery.

Chart 1: Number of houses under construction during the quarter

Source: ABS Building Activity

The HomeBuilder program, launched by the Federal Government during the pandemic, contributed significantly to the backlog of residential construction projects. To qualify for the HomeBuilder grant, applicants were required to enter a contract between June 2020 and March 2021, with construction to commence within 18 months of the contract date. This timeframe aligns with the shaded area on Chart 1, indicating a period where houses under construction increased by approximately 86%. As such, HomeBuilder distorted demand by inducing a ‘bring forward’ of activity that otherwise would have taken place later (or not at all), further straining a sector already under pressure.

The construction industry faces significant challenges, with labour shortages being a major barrier to boosting the level of activity. BuildSkills Australia estimates that an additional 90,000 workers would be necessary to meet the Federal Government’s 1.2 million new homes target, while Master Builders estimates this figure to be closer to 130,000 workers. Despite the construction workforce being the largest it has ever been, poor labour productivity has exacerbated the shortage, with the average hourly output per worker falling by 18% over the past decade. Infrastructure projects, which typically offer relatively better wages, have also drawn workers away from residential construction. The Australian Construction Association suggests that improving project procurement, delivery, and governance could boost productivity.

The construction industry has also been severely affected by rising material costs, with the Reserve Bank of Australia reporting a nearly 40% increase in homebuilding costs since 2019 due to supply chain disruptions and competition from other construction sectors. While dwelling prices have increased, they have not kept pace with these rising costs, squeezing profit margins and contributing to the relatively high level of insolvencies in the sector. 

The ambitious target of 1.2 million new homes over the five years to 2029 is looking less feasible by the day. Although state and local governments are starting to pull planning, regulatory and policy levers, the private sector is responsible for delivering the projects. Currently, the construction industry is struggling to deal with the backlog from HomeBuilder let alone ramping up activity to meaningfully rebalance supply and demand.

Dwelling investment is expected to pick up over the next few years, but not quickly enough to reach the 1.2 million homes target. Deloitte Access Economics currently expects fewer than 1 million dwelling commencements over the next five years.

This newsletter was distributed on 9th October 2024. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Amy Kerrigan, Graduate Economist at Deloitte Access Economics

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