A recovery in new home building is expected to take hold in medium sized Australian capital cities such as Perth, Brisbane and Adelaide, new forecasts suggest.

But conditions in Sydney and Melbourne are expected to remain sluggish.

In its latest forecast, Housing Industry Association (HIA) said it expected a modest recovery in new home building starts across Australia to commence from the current financial year onward.

After bottoming out at what is expected to be a twelve-year low of 160,030 in 2023/24 (current forecast), HIA expects the overall number of dwelling commencements throughout Australia to increase by a modest 5 percent in 2024/25.

Beyond that, a stronger recovery is expected to take hold from the middle of next year, with dwelling commencements expected to return to healthy levels from 2025/26 onward (see chart).

At an aggregate level, the market for new home building has been impacted over recent years by higher interest rates, subdued economic conditions, higher land and construction costs and an overhang from the previous pull-forward effect of the Commonwealth Homebuilder program.

Going forward, however, a sustained recovery in activity is expected to be supported by strong (but easing) population growth, ongoing low levels of unemployment and an undersupply of housing that is shown through tight rental markets.

That aggregate story, however, obscures a divergence across both geographic locations and housing typologies.

In terms of locations, HIA says that markets are on the rise in Western Australia, Queensland and South Australia but remain sluggish in New South Wales and Victoria.

In the three former states, improving conditions are being supported by more affordable housing and relatively strong levels of population growth, economic performance (relative to other states) and employment opportunities.

In these markets, encouraging signs can be seen from increasing numbers of home building contract signing and a greater number of new projects coming online.

By contrast, market conditions in the two largest states are set to remain sluggish for now as these states are impacted by relatively subdued economic conditions and high costs for land and housing. The higher costs have meant that markets in these states have been particularly sensitive to the higher interest rates and mortgage repayment increases which have taken hold over the past two years.

Indeed, HIA says that activity in Melbourne and Sydney may stagnate over the medium terms as workers relocate to more affordable markets.

In terms of typologies, meanwhile, almost all of the improvement in commencements across 2024/25 is expected to come from the multi-unit sector (units, townhouses, apartments etc.).

All up, multi-unit commencements through Australia are expected to increase by 13 percent from a forecast 60,970 in 2023/24 to still subdued levels 68,880 in 2024/25.

Interestingly, the report notes that the anticipated recovery in multi-unit residential construction has taken longer to come through compared with what has been previously anticipated.

During previous forecasts, there had been an expectation that a recovery in multi-unit residential construction would begin to take hold in 2023/24. This expectation had been supported by a belief that higher density housing would lead the recovery in new housing construction as higher dwelling costs forced homebuyers to consider more affordable housing typologies and tight rental markets were to drive demand for housing typologies which commonly cater for the rental market.

In its report, however, HIA says that the recovery in this segment has taken longer to materialise compared with what was previously anticipated.

Instead, a modest recovery in this sector is now slated to begin in the current financial year.

Turning to detached housing, HIA expects the number of commencements to remain virtually unchanged at decade low levels over the current financial year – although markets such as Perth, Brisbane and Adelaide are expected to perform reasonably well as mentioned above.

A stronger recovery in detached house construction is not expected to take hold until 2025/26.

Housing Industry Association Chief Economist Tim Reardon welcomed the signs of recovery in some locations.

“It is nine months since the RBA’s last rate rise and market confidence is returning,” Reardon said.

“Most housing markets appear to have reached or passed the trough in home building by mid-2024, following the fastest increase in the cash rate in a generation.

“States with good employment opportunities and relatively more affordable land are leading the charge.

“Western Australia, Queensland and South Australia appear to be past the trough in their cycles. The number of contracts being signed for the construction of new homes has been increasing, at least since the start of the year, seeing a new wave of projects commencing construction.

“(But) This improvement in home building activity is not evident in New South Wales and Victoria …”

In its report, HIA encouraged governments to do more to ease the tax and regulatory burden on land and new housing.

In particular, HIA highlighted the cost of infrastructure provision.

Prior to the 1980s, costs associated with this had been broadly shared between state governments and land developers.

From the 1990s onward, however, much of this has now been pushed onto developers and eventual home buyers. In some states such as NSW, this is extending not just to the cost of building new infrastructure but also costs associated with infrastructure operation and maintenance.

The upshot, HIA argues is that more new taxes and charges are adding to the cost of land and new housing provision.

Instead, the Association would like to see a return to what it says are more equitable models of infrastructure funding provision.

Reardon said that governments should do everything possible to ease the burden on new housing provision.

He says that opportunities to unlock a greater housing recovery are significant.

“Australia’s economic fundamentals have remained resilient to the rise in interest rates,” Reardon said.

“Unemployment remains exceptionally low, the economy stable and population growth strong.

“Against a backdrop of an acute shortage of housing, households are slowly returning to the new home market.

“Australia could be seeing far greater home building volumes, if policymakers would reduce the costs of land and construction that they are responsible for inflating.

“Productivity in the sector is improving rapidly as the adverse impact of border closures and policy disruptions are replaced with more stable conditions.

“Material price rises are back to pre-pandemic levels and labour shortages have eased to some extent.

“Labour shortages are easing as activity levels decline.

“These factors are setting the scene for an increase in home building later this year as confidence is restored.

“This increase in new home commencements could be accelerated if governments remove the market failures, tax imposts and constraints on the industry, or at least stop increasing housing taxes.”

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