Rising interest rates will have only a modest impact on new home construction activity in Australia, the latest forecast suggests.

Releasing its latest report, Housing Industry Association (HIA) says it expects the volume of work in new dwelling construction and established home renovations to remain at healthy levels despite higher rates and surging costs.

According to HIA:

• The number of commencements in detached house construction will ease back by 6.7 percent from breakneck levels of a forecast 131,730 starts in 2021/22 (final 2021/22 results will be released in October) to still elevated levels of 121,320 commencements in 2022/23 before dropping back to pre-pandemic levels of 99,330 commencements in 2023/24.
• Multi-unit residential starts will increase by 4.4 percent from a forecast 76,930 in 2021/22 to 80,270 in 2022/23 before increasing by a further 2.5 percent in 2023/24.
• After peaking at a record $45.705 billion in 2021/22 (forecast), the dollar value of work done on established home renovations will ease back over the next two years but remain far higher compared with any other time before the pandemic (refer chart).

HIA Chief Economist Time Reardon acknowledged that rising interest rates along with uncertainty about how much further rates are going to increase will accelerate a downturn in demand for new homes that is already underway on account of rising build costs.

But he says the existing record pipeline of work will create a buffer that will soften the impact of the rate rise.

At any rate, Reardon says several factors will help to support healthy levels of demand.

These include an easing in material shortages as well as in shipping timeframes and costs; the return of migration; low unemployment; and a shortage of rental homes.

Meanwhile, strong financial buffers will aid households in absorbing higher rates.

“The rise in the cash rate will have a minor impact compared to the events of the past two years,” Reardon said.

“The fastest increase in the cash rate in almost 30 years will bring Australia’s home building boom to an end, but there is a significant buffer of building work to be completed.

“Despite the uncertainty around the cash rate, demand for new homes – especially multi-units – will be supported by low unemployment, booming export markets, an acute shortage of rental homes and a return of overseas migrants, students and tourists.”

The HIA Outlook Report includes updated forecast for new home building and home renovations both nationally and for each state and territory.