Victoria’s home building sector is now back on the rise, as ‘hard data’ confirms that activity is re-accelerating, an industry breakfast has heard.

And the state’s home renovations sector is set to ‘boom all over again’.

During a series of industry breakfasts held last week, Housing Industry Association senior economist Tom Devitt gave an overview of the outlook for new home building and home renovations activity across Australia.

During the Melbourne event held on Wednesday, Devitt focused particularly on Victoria.

According to Devitt, there is now ‘hard data’ to demonstrate that Victoria has joined the national recovery in new home building.

In particular, the state saw a 34.8 percent surge in new home sales during the month of September.

Granted, this was partly a one-off monthly phenomenon that was driven by the extension of the Commonwealth Government’s 5 percent Deposit Scheme. Indeed, the September result was followed by a 19.5 percent contraction in October.

Nonetheless, Devitt says that the data provides tangible evidence that the state has now turned the corner.

“I’m much happier to be delivering the housing and renovations economic outlook today (compared with his previous presentation in June 2024),” Devitt said.

“We finally have some hard data that is showing that Victoria’s building industry has now turned the corner even if there are still some constraints ahead (see below).

“And the renovations sector in particular looks like it’s about to boom all over again.”

“The last time I gave this presentation was in June last year (Devitt’s colleagues have given three presentations between then and now).

“At that time, we were noting that some of the states were already picking up in terms of home building and renovations activity. This was specifically led by WA, Queensland and South Australia.

“That boded well for NSW and Victoria to eventually follow suit.

“It’s been almost another eighteen months (since then), but it’s here.

“First, we saw the green shoots in Victoria. Now we can see some actual hard data.

“We’ve now got three interest rate cuts in the back pocket plus a few state and federal government goodies recently announced (such as the extension of the Commonwealth 5 percent Deposit Scheme).

“And so that improving on the ground activity that we have seen in the medium sized states is now spreading to the laggard states. This is not just Victoria and NSW but also the smaller jurisdictions such as Tassie, NT and the ACT.”

Australia in early stages of long and strong recovery

Devitt’s comments come as Australia’s home building sector is in the early stages of what is expected to be a sustained recovery in activity.

Since bottoming out in September 2023, the seasonally adjusted number of new dwelling commencements has increased at a national level during five of the past seven quarters.

To date, the recovery has been concentrated in Western Australia, Queensland and South Australia.

Conditions across New South Wales, Victoria and smaller jurisdictions have been softer.

According to Devitt, there are several reasons for this.

First, there is population growth.

To be sure, virtually all jurisdictions have seen strong net overseas migration flows in the years since borders reopened after COVID.

Within our country, however, there has also been a shift within the domestic population away from New South Wales, Victoria and smaller states toward Western Australia, Queensland and South Australia.

This has driven greater housing demand across the medium-sized states at the expense of the remainer of the country.

Next, there is house prices.

Partly because of the demand redistribution referred to above, these have risen much faster in medium sized states compared with elsewhere.

Over the six years to June 2025, average dwelling values in Western Australia, Queensland and South Australia increased by 91 percent, 86 percent and 83 percent respectively.

Over that same period, dwelling prices in Victoria increased by only 23 percent.

From a construction viewpoint, this has meant that many projects remained feasible across the medium-sized states notwithstanding a surge in construction costs that followed the pandemic and the outbreak of war in Ukraine and Israel/Gaza.

The same cannot be said for Victoria, where feasibility has been challenged as dwelling values failed to keep pace with cost increases.

Finally, markets in medium-sized states have over recent years enjoyed cheaper land prices compared with Victoria and especially New South Wales. (However, land prices in Brisbane have now overtaken Melbourne whilst land prices in Perth have almost caught up with those in Melbourne.)

This has further aided development feasibility across these states.

Recovery now spreads

Now, however, Devitt says that the recovery is spreading and that activity in Victoria is expanding again.

Going forward, he says that several factors will support further expansion in activity.

Primarily, these are national factors that will support expansion across the country.

This includes Victoria but is not limited to the state.

They include:

• Ongoing elevated levels of net overseas migration and population growth (notwithstanding that these have come off peaks). This will continue to underpin an increasing requirement for new housing.
• Three interest rate cuts. These have put more money in household pockets and helped to ease developer financing constraints in undertaking new projects. They add to the boost from the extension of the Commonwealth home deposit scheme.
• Continued labour market strength. Across the nation, unemployment levels remain below five percent in every state/jurisdiction. These stable levels of employment are helping to support consumer and lender confidence in household ability to meet ongoing mortgage repayments.
• Building cost stabilization. After a surge in construction costs which occurred following COVID and the outbreak of wars in Ukraine and Isreal/Gaza, the rate of cost escalation has moderated back toward more normal levels of between four and six percent per annum. Material price pressures have eased and the rate of increase in trade prices now appears to be moderating. This is helping to restore project viability.
• Ongoing shortage in rental housing. This is seeing tight rental vacancy rates (currently 1.2 percent nationally) and strong rental price growth. In turn, this is bringing investors back into the market and leading more households to lean toward home buying rather than renting.
• A recovery in real wages following a contraction which occurred during the high inflation period of 2022. This is further enhancing mortgage servicing capacity and is underpinning greater confidence to undertake new home construction.
• Improving consumer confidence. After three years of negative readings, the Westpac-Melbourne Institute measure of consumer confidence is now back in positive territory. This will further enhance homeowner confidence in undertaking new building projects.

All this, Devitt said, is laying the foundation for a strong and sustained housing recovery.

“With a rapidly growing and well employed population plus construction costs being more contained, tight rental markets, recovering incomes and three rate cuts in the back pocket, that should help to bring more people back to the new home build,” he said.

A new home renovation boom

Meanwhile, HIA also expects the home renovation market to boom again.

Since peaking in mid-2022, Victorian home renovation activity has eased back on account of higher interest rates and building costs.

However, activity remains at historically elevated levels (see chart).

With interest rates now lower, the stage is set for the next upturn.

According to Devitt, several factors will drive this.

First, HIA believes that COVID shifted the dial permanently in terms of what property owners expect from their home.

This includes extra space and amenity in terms of higher end kitchens, extra bathrooms, electronic and entertainment rooms and backyard projects.

Over the past three years, much of this greater expectation has been squeezed out by higher finance and construction costs.

However, Devitt says that the desire for upgrades remains, especially as working from home is an ongoing phenomenon.

Second, house prices are back on the rise, including in Victoria.

This has two effects.

First, it makes homeowners feel wealthier and therefore more willing to undertake improvements to increase the value of their property.

Second, as dwelling prices rise, existing home renovation becomes a more affordable option compared with moving to a new home.

Finally, further renovation demand will be supported by the aging of dwelling stock (and the need to update older homes) and repairs associated with any weather-related events which occur.

As with new home building, evidence of the reacceleration in home renovations activity is supported by hard data.

The number of loans that were approved to finance larger renovation projects increased sharply across the June and September quarters from already elevated levels in historic terms.

“The fundamentals continue to support renovations across most of the country,” Devitt said.

“With interest rates coming down, costs being more contained and confidence returning, we should get a lot of people undertaking more of those projects that were put on the backburner in recent years.”

Risks and constraints

Still, there are constraints to the recovery in both new home building and home renovation.

First, inflation proving to be more stubborn and persistent compared with what had been expected, further interest rate reductions are likely to be on hold for the time being.

Second, courtesy partly of a record program of public infrastructure work, the availability of skilled trades remains constrained notwithstanding that shortages have eased from recent peaks.

In the most recent edition of the HIA Trades Report, twelve of the thirteen categories of residential construction trades that were captured in the report remained in shortage.

This may both restrict the number of homes that can be delivered and add further pressure to trade prices and construction costs.

As things stand, trade prices have risen twice as fast as average wages over the past six years.

Finally, there is land.

Across 2024/25, land prices increased by 6.8 percent – more than three times the rate of consumer inflation. This included a 29 percent surge in prices across the Perth Metropolitan Area.

Meanwhile, sales volumes remain at near multi-decade lows.

This, Devitt says, indicates a shortage of ‘shovel-ready’ land that will constrain the recovery and add to the cost of new home delivery.

Whilst prices remain stable in Victoria, Devitt says that this could change not enough shovel-ready land is made available to meet the expected increase in demand.

Size of recovery depends on those in charge

Devitt says that the size of the recovery depends on the actions and decisions of governments and policy makers.

“The size of the next cycle in both markets is going to depend on policy makers providing affordable shovel-ready land as well as dealing with labour availability and a number of other policy factors,” he said.

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