Ground is breaking on a smaller number of new homes and apartments across Australia as higher interest rates are feeding into lower levels of demand for new home construction, new data shows.

And soft data on leading indicators suggests that new home commencement numbers will contract further in coming months.

But builders are still struggling to work their way through a record pipeline of detached home building projects (see below).

Releasing the latest edition of its Building Activity report, the Australian Bureau of Statistics has provided estimates of the value of building work that was performed in the December quarter along with the number of dwellings which were commenced, completed, under construction or in the pipeline during the quarter.

On a seasonally adjusted basis, the data indicates that the number of dwellings that were commenced throughout Australia dropped back by 6.7 percent during the December quarter to come in at 41,374.

At this level, seasonally adjusted commencements were at their second-lowest number on record since the March quarter of 2013.

Leading the way was the statistically volatile multi-unit sector (units, townhouses and apartments), where commencements plummeted by 16.0 percent in seasonally adjusted terms (public and private sector included) to come in at 12,518.

This represents the lowest level of seasonally adjusted multi-unit starts since the March quarter of 2012.

Meanwhile, detached house starts (public and private combined) eased back by 2.5 percent to come in at historically modest levels of 28,586 (seasonally adjusted).

The latest data provides further confirmation that rising interest rates are affecting demand for new home construction.

Whilst the Reserve Bank of Australia (RBA) hit a temporary pause on further interest rate increases in March, official interest rates have risen from 0.1 percent since the RBA began its cycle of monetary policy tightening last May to the current rate of 3.6 percent.

That has raised the cost of servicing new mortgages and has reduced the borrowing capacity of prospective new home buyers.

The higher rates have also increased the cost of finance for property developers and have thus impacted the feasibility of new development projects.

Moreover, there are signs that commencement numbers are likely to fall further.

In February, ABS lending data indicates that the number of loans that were made to owner occupiers for the purpose of either constructing a new dwelling or buying a newly erected dwelling fell to its lowest level since November 2008.

Meanwhile, seasonally adjusted dwelling approvals steadied during February but remained at their second lowest level since July 2012.

Given that construction lending and building approvals occur prior to dwelling commencements, these data sets indicates that new dwelling commencements are likely to fall further.

Meanwhile, the data also indicates that the construction industry is struggling to work through a record pipeline of projects.

This pipeline accumulated over the two years from the middle of 2020 until the middle of 2022 as demand for new housing surged in response to emergency-low interest rates (prior to the latest monetary policy tightening cycle) and incentives for new home building such as the Commonwealth Homebuilder program.

Across Australia, a total of 238,475 dwellings were under construction as at December 31.

This is down from the record of 243,456 dwellings set in September but nonetheless represents a massive pipeline of home-building work by historic standards (see chart).

Despite this, dwelling completion numbers remain at relatively modest levels (see chart).

Across Australia, 42,922 dwellings were completed in the December quarter (seasonally adjusted) whilst 172,317 were completed across calendar 2022.

Granted, the strong pipeline of work has a silver lining in that builders and tradespeople are likely to remain busy throughout 2023 notwithstanding the slowdown in new home construction.

Nonetheless, the modest level of completions relative to the pipeline of work indicates that builders have been challenged in bringing homes to completion and that completion timeframes for new home construction have increased.

This is due to capacity challenges as massive levels of building activity have led to constraints on material and labour availability.

Building industry lobby groups warn that the latest slowdown in new building activity will exacerbate long-term challenges associated with housing supply and affordability.

In particular, the groups say that the slowdown will accentuate difficulties in meeting the Commonwealth/State targets of delivering one million homes over the five years from 2024 as set under the National Housing Accord 2022.

Denita Wawn, CEO of Master Builders Australia, said the shrinking size of the new home-building pie is concerning.

Wawn encouraged Commonwealth and State governments to invest in more social housing and to unblock regulatory burdens to new housing delivery.

“Building and construction activity makes a substantial contribution to the Australian economy,” Wawn said.

“Reverses in new home building will subtract from Australia’s overall rate of economic growth.

“Higher-density home building has sunk to its lowest in a decade at a time when inward migration is soaring to unprecedented levels. This combination is likely to further exacerbate rental market pressures.

“A strong building industry is the foundation of a strong economy. The inextricable ties between construction activity and the broader health of the economy are again on display in the current environment.

“Despite the strong intention of both governments and industry to reach a target of one million homes under the Housing Accord, the data highlights that more needs to be done to tackle labour shortages and other supply constraints to speed up the delivery of new homes.

“More needs to be done to speed up the delivery of new housing in the medium and high-density part of the market over the short term. Government efforts to expand the stock of social and affordable housing will provide welcome support.

“Builders continue to face regulatory burdens and prolonged delays in approvals for building applications, occupation certificates and land titles. Additionally, land shortages in the wrong places, high developer charges and inflexible planning laws are restricting opportunities to meet demand, speed up project timelines, and minimise costs to both builders and their clients.”

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