The downturn in new home construction throughout Australia will continue until the middle of next year, new forecasts suggest.
The Housing Industry Association has released the Autumn edition of its HIA National Outlook report, which provides forecasts of new dwelling construction and home renovation activity across the eight states and territories.
According to the forecasts, the overall number of starts in new dwelling construction will continue to contract from a forecast 44,372 in the current June quarter (seasonally adjusted) to bottom out at 43,604 in the March quarter of next year.
Beyond that, commencement numbers will begin to recover as a continued decline in detached house commencements is offset by a recovery in multi-unit starts (see chart).
Meanwhile, the value of work in existing home renovations is expected to continue to recede from its recent peak but remain at elevated levels over the next couple of years.
The latest forecast comes as Australia’s housing construction sector is experiencing a significant slowdown following an unprecedented boom in detached house construction and home renovation activity.
The boom was driven by COVID stimulus measures such as the Commonwealth HomeBuilder program along with two years of emergency low interest rates.
It was primarily concentrated in detached housing and home renovations as tight eligibility deadlines for HomeBuilder meant that this program was less well suited to multi-residential projects.
Whilst it had long been anticipated that activity would recede after the peak of the boom, the slowdown in new housing work has been much more severe compared with previous expectations.
This has occurred as faster than expected interest rate rises have impacted the willingness and capacity of consumers to borrow at the same time as significant increases in construction costs have affected the price tag and affordability of new homes.
On the developer side, meanwhile, the rate hikes and cost increases have further impacted new project viability through higher financing costs and greater pressure on margins.
The effect of this can be seen in data relating to numbers of new home sales, dwelling approvals and loans to finance the purchase or construction of new homes.
All of these indicators are at or near decade lows.
Turning to home renovations, the recent boom in activity was likewise driven by previously low interest rates and the HomeBuilder program – which provided incentives for existing home renovations as well as new home construction.
In addition, the home renovations sector has been further boosted as COVID and stay-at-home restrictions directed greater homeowner attention toward the quality of space which is afforded by their premises along with the suitability of their dwelling to facilitate working from home.
Whilst the boom is now receding, HIA says these pandemic related trends along with repairs from weather related damage are likely to support elevated levels of activity for the near future.
In addition, renovation activity may not be as heavily impacted compared with that of new home construction by cost and interest rate increases.
The relative affordability of home renovation projects means that these projects are often less sensitive to interest rate increases compared with new home construction.
Speaking predominately of new home construction, HIA Chief Economist Tim Reardon said that the near-term outlook is concerning.
Reardon added that the slowdown will jeopardise the target of delivering one million homes over the five years from 2024 which is set under the National Housing Accord 2022.
Reardon encouraged policy makers to adopt several measures.
These include passing the Commonwealth Government’s Housing Australia Future Fund bill along with removing barriers to investment, reforming local council planning processes and adopting stable economic settings.
“Despite record levels of migration, the number of new homes commencing construction is set to slow for at least the next 12 months,” Reardon said.
“There has been a rapid slowdown in the volume of new building projects entering the pipeline, especially new apartments, over the past year.
“The sharp increase in the cash rate has compounded the barriers created by extraordinary restrictions on lending and investing, increased construction costs and regulatory costs.
“The rise in the cash rate is the key reason for the slowdown in the number of new homes commencing construction. There are long lags in this cycle and the full impact of the increases to date will not be apparent, until late 2024.
“Leading indicators of home building activity have fallen to exceptionally low levels. New home sales are almost 50 per cent lower than a year ago. Lending for the purchase or construction of a new home has fallen to its lowest level since 2008.
“The slowdown in the commencement of new homes is counter to the goal of increasing supply and delivering one million homes over the next five years.
“Beyond the rise in the cash rate, the supply of new homes is also constrained by a range of regulatory and cyclical challenges. The Government’s Housing Australia’s Future Fund isn’t a solution to all of these problems, but it is a necessary step toward improving the supply of new homes.
“Removing barriers to investment, reforming local council planning processes and stable economic settings are also necessary steps.”
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