Real Estate Investment:Today

New construction approvals continue to fall

What’s behind the recent slump in home building approvals?

For two consecutive months now, approvals to build new dwellings have fallen, with the most recent Building Approvals release from the Australian Bureau of Statistics showing that there has been a 2.4% decrease month-on-month in the number of dwellings that have been approved.

Digging deeper, the major factor driving this slump was the 6.1% fall in apartment and semi-detached approvals.

This trend is not a recent one

A closer look at the data reveals that this trend is in fact, not a recent one.

Approvals have been declining since their March 2021 peak.

As a matter of fact, a comparison between the past six months (November 2020 to April 2022) and the previous six months (May 2021 to October 2021) shows a 14% decrease in dwelling approvals.

It is important to realize that the construction industry is experiencing challenging conditions, with record rises in input costs.

What is causing these challenging conditions?

According to Megan Lieu, Economic Analyst at REA Group, there are a few contributing factors to these challenges:

  1. The government’s Home Builder Scheme

This scheme, along with historically low-interest rates brought an influx of demand as many Aussies sought to build new homes.

Of course, this exacerbated the shortage of labour within the industry and drove up hiring and subcontracting costs.

  1. Shortage of key building materials

The pandemic outbreak around the world led to the closures of factories and ports, limiting production and delaying transportation.

Obviously, these supply chain constraints have heightened the demand for available stock and inflated prices.

For example, the price of structural timber rose by 34% from the March 2021 quarter to the March 2022 quarter.

This is evident with the ABS’s producer price index showing that input costs for housing construction have increased by 15% over the past year.

Annual Change In Costs For Inputs Into The Housing Construction Industry

3. Shortage of labour and equipment

This situation has deterred many developers from commencing construction projects.

This is in fact evident in the 10% year-on-year decrease in active construction projects nationwide.

Yoy Change In Active Projects By State

 What’s ahead?

With the HomeBuilder scheme now retired, interest rates expected to increase further, and input costs not anticipated to abate in the near term, building houses and apartments is set to remain more expensive for some time to come.

Megan Lieu, Economic Analyst at REA group further explained:

“In the near term, developers and those mid-build will continue to face challenges and delays.

But over the longer term, we expect to see cost pressures fade and more projects commence.

That said, there is quite a bit of uncertainty about when those favourable conditions will return.”

Editor’s note: Source of graphics and commentaryNew construction approvals continue to fall. What’s behind the home-building slump?

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About Bryce Yardney
Bryce is a property development specialist, having successfully sourced, project managed and completed hundreds of development projects for Metropole’s clients, helping them create substantial wealth.Visit Metropole.com.au

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