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By Brett Warren
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Could rising property prices unlock new supply?

Home prices have surged in recent years, mortgage rates have climbed, and household incomes haven’t kept pace.

As a result, housing affordability has plummeted to its worst level in at least three decades.

Despite a dire shortage of homes, the delivery of much-needed new homes has faced significant obstacles.

Labour shortages, disrupted supply chains, and pandemic-related restrictions have all played a part.

Price Rate

Ms Eleanor Creagh, Senior Economist at PropTrack commented:

"Compounding these issues are pre-existing challenges like delays in planning, limited land availability, and excessive bureaucratic processes.

These delays not only slow down the building process but also contribute to higher construction costs, which are further inflated by rising building material prices and increased financing costs.

These challenges have led to a persistent housing supply deficit, pushing up prices for both existing homes and rentals.

While many hope that housing supply will eventually catch up with demand, per capita building completions and approvals are currently at historic lows.

Unless these challenges and cost pressures ease, delivering enough new houses or apartments will be difficult, and the housing and rental affordability crisis will worsen."

According to PropTrack's data, since the pandemic, building input prices have increased by 33.4%, while output prices have risen by 40.1% for houses and 23.2% for apartments.

Prices Of New Houses Vs Established Western Sydney

Although price rises have stabilised in the past year, build costs remain high and continue to increase, albeit at a slower pace.

Prices Of New Units Vs Establised Western Sydney

Ms Creagh explained:

"Higher labour, materials, and financing costs compress margins, resulting in potentially lower returns on investment, which has delayed many projects.

The surge in these costs has pushed up the prices of new builds, with established house and unit price growth in Sydney lagging behind new builds.

This greater price inflation for new builds has increased the premium of buying new housing over existing stock, presenting another challenge for new development.

While there is strong demand for new housing, construction costs have risen so much that in many parts of the country, replacement costs are more expensive than existing homes.

This means buying an existing home in lower-cost new build areas may be more attractive."

PropTrack's data highlight that in Sydney, most new house development is occurring in Western Sydney’s 11 local government areas.

Here, the median price of new houses is currently listed at a 21% premium to existing houses for sale.

Potential investors and owner-occupiers considering Western Sydney’s new house and land market may also look at the established market due to the current premium of buying new.

Ms Creagh further explained:

"Of course, buying new homes offers advantages such as maximum depreciation benefits and eligibility for the first homeowner grant scheme, which is not available for established homes.

This dynamic is evident in the unit market as well, creating a difficult environment for the pre-sales necessary for property development finance.

Development financing is a significant hurdle for apartment commencements, and the current environment makes it increasingly difficult to launch large apartment projects despite the need for more supply.

This trend is also prevalent in other parts of the country, though the situation looks slightly different in Perth’s new development regions.

Strong price rises for existing houses over the past year have narrowed the gap between buying new and existing homes."

It was also noted that Perth has been the strongest-performing housing market in the country over the past year.

Prices Of New Houses Vs Established Perth

Many of the suburbs seeing the strongest growth in Perth, such as Rockingham, Armadale, Kwinana, Wanneroo, and Mandurah, are regions with lots of new development.

Top 10 Highest Growth Suburbs For Houses Over The Past Year

For example, median values for houses in Armadale have jumped almost 50% in the past year, potentially spurring better demand and pricing conditions for developers of new homes in Perth.

Early signs of a market recovery

Amid strong housing demand, the new homes market shows signs of accepting higher costs, though demand for new developments listed on realestate.com.au remains project-specific.

Glimmers of recovery are evident in new loan commitments, with a 6.0% month-on-month increase in lending for construction and a 10.8% month-on-month increase in lending to purchase newly built dwellings in April 2024, according to the Australian Bureau of Statistics (ABS).

This brings the value of new lending to purchase newly built dwellings up 22.4% over the year to April 2024.

Increasing housing supply

It’s clear the cost to build is too high relative to the cost of buying established housing, hindering activity and creating a difficult environment for pre-sales needed to finance large-scale projects.

Aside from developers reducing margins, shifting this dynamic requires a combination of moderating build costs (materials, wages, planning/approvals processes, land acquisition costs, productivity), lower financing costs, and/or continued house price growth.

Ms Creagh noted that:

"While construction cost increases are normalising, they are unlikely to decrease, meaning market participants will need to adjust to this higher input cost environment.

Industry productivity, innovation, and advanced manufacturing techniques have a role to play."

Australia’s construction industry lags in productivity. Construction productivity today is lower than it was in 1990, and labour productivity growth in the sector has been low (0.3% per year) for over 20 years, a fraction of that in the transport and manufacturing sectors.

Price

Ms Creagh said that in the near term, continued price increases in the established market are the most likely lever to close this gap.

This will allow developers better pricing conditions and increase the viability of capital flows into building new homes.

This is one reason we expect home prices to continue rising in the months ahead.

Efforts to ease development constraints, such as fast-tracking approval processes, reforming planning and zoning restrictions, unlocking land supply, and increasing densities around transport hubs, are both necessary and encouraging.

But until construction cost constraints improve and the gap between new and existing prices narrows, the significant uplift in residential construction activity required will be difficult to achieve.

She further explained:

"As this premium narrows, cost increases stabilise further, and interest rates begin to move lower, project feasibilities will improve, enabling new ventures.

As a result, a recovery in new housing supply should be underway, particularly given the current strong demand for housing.

However, all these factors will take time to materialise in new approvals and subsequent new supply coming online, meaning upward pressure on rents and existing home prices will remain until new supply becomes available."

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.
2 comments

One thing that I've never seen mentioned as a contributor to rising house prices is over-engineering. I can tell you from bitter experience that engineers are overdesigning structures to cover their own backsides. It doesn't cost them a cent to doubl ...Read full version

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