Australia’s housing construction sector is expected to experience subdued conditions in 2024, the latest forecasts show.
Housing Industry Association (HIA) has released the latest edition of its quarterly economic and industry report, which includes updated forecasts for new home building and home renovation activity across each state and territory.
At a national level, the report points to a subdued year of activity in 2024 as an upturn in multi-residential projects is offset by continued slowing in the flow of detached home building work.
Across 2023/24, HIA expects the number of commencements on new detached homes to contract by a further 10.9 percent from 109,890 in 2022/23 to come in at levels which are lower than at any other time since 2012/13 (see chart).
Beyond that, it expects detached house commencement numbers to remain flat in 2024/25 before recovering modestly in 2025/26 and exceeding 110,000 by 2026/27.
Breaking this down to a quarterly basis, detached home starts are not expected to reach their low point until the September quarter of 2024 (see chart).
More pleasingly, activity in multi-unit residential construction (units, townhouses, apartments etc.) is expected to recover after an extremely subdued year in 2022/23 which saw commencements of just 62,290 – the lowest annual level of starts since 2011/12.
In the current financial year, multi-unit commencements are expected to bounce back by 22.3 per cent to reach a still modest level of 76,160.
Beyond that, annual multi-unit commencements are expected to increase by a further 19.0 per cent in 2024/25 and remain above 90,000 for the remainder of the forecast horizon.
The latest data comes as the market for new home construction has been severely impacted by the Reserve Bank of Australia’s aggressive cycle of monetary policy tightening which has seen official interest rates increase from 0.1 percent in May last year to their current level of 4.35 percent.
That has seen both building approvals and lending to finance new home construction fall to their lowest level in more than a decade – albeit with approval and lending numbers having stabilised in recent months.
This comes on the back of a record level of detached home building activity which occurred throughout 2020/21 and 2021/22 on the back of low interest rates and COVID related stimulus such as the Commonwealth HomeBuilder program.
In addition to rising interest rates, the industry has also faced pressures on the cost and availability of land, labour and materials – although pressures in these areas are now easing.
Housing Industry Association Chief Economist Tim Reardon said that rising interest rates will lead to lower volumes of home building activity.
He says the impact will be particularly severe in Sydney and Melbourne on account of the higher costs of delivering new house and land packages in these markets.
Reardon cautions that the low levels of construction activity will flow through to the broader economy and will impact efforts to increase housing supply – particularly in major metropolitan regions where supply is tight.
He called on governments to minimise the cost of shovel-ready land, attract more investment from overseas and ease the tax burden on new housing.
“The rise in the cash rate is hitting the Sydney and Melbourne new home markets the hardest,” Reardon said.
“The RBA’s rate increases are yet to adversely impact the lagging indicators of economic activity like unemployment or inflation, but they are impeding future home building activity.
“Leading indicators of home building activity including approvals and lending have fallen sharply, to decade lows, and have remained at these levels for most of 2023.
“This will flow through to a significant slowdown in detached home building in 2024, producing the lowest level of new commencements in more than a decade and keeping apartment construction suppressed.
“This low volume of new home commencement is at odds with the goal of increasing the supply of housing stock, especially in the tight rental markets of Sydney and Melbourne.
“The higher costs of delivering a new house and land package, or a new apartment, in Sydney and Melbourne is resulting in a greater impact from the rise in the cash rate in these areas.
“Interest rates helped drive a boom in building through the pandemic and a return to a stable market isn’t likely given the subsequent rise in the cash rate.
“House building activity is set to slow in all regions, except for Western Australia, under the weight of rising interest rates.
“There remains a significant volume of building work still to be completed and as this occurs, home building will drag on economic growth and push unemployment higher.
“The cost of building materials and labour is stabilising on this side of the pandemic, but they are not likely to fall substantially.
“Increasing the volume of new homes commencing construction against the rising cost of borrowing will require governments to lower the cost of shovel ready land, attract more investment especially from overseas and reduce tax imposts.”
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