Low home completion data a canary in the coal mine for our housing targets

The latest numbers on new home starts are out and it isn’t good news showing Australia is facing a significant challenge in meeting its national target of 1.2 million new homes over the next five years.

The promise of increasing housing supply is under severe threat from two major issues: high interest rates and escalating construction costs.

These factors are creating a perfect storm, choking the pipeline of new housing developments and making it increasingly difficult to address the nation's housing shortage.

Housing completions data from the Australian Bureau of Statistics show that the new home supply in the first quarter of the year was well below the levels needed to meet the country’s housing targets.

In the March quarter of 2024, 41,329 homes were completed across Australia, a decrease from 45,643 in the December 2023 quarter.

This represents a seasonally-adjusted quarterly fall of 9.5 per cent and is the second lowest quarter of housing completions in the last 10 years.

To reach our national housing target of 1.2 million new homes by 2029 Australia needs to be averaging 60,000 homes each quarter over the next five years.

Property Council Group Executive Policy and Advocacy Matthew Kandelaars said low housing completions cast a dark cloud on the nation’s 1.2 million new homes target, which came into effect this month.

“Today’s figures reveal the extent of the challenge and just how much we need to lift our game to hit our targets,

If housing supply stays this low, we will only manage to build around 830,000 homes over the next five years, leaving us a whopping 370,000 short.

If we don’t start increasing the pace, we will miss what should be an achievable target by a country mile.

Governments across the country need to utilise every possible measure to assist the industry deliver the supply of new homes we so desperately need.

We will only achieve our target of 1.2 million homes by applying increasing amounts of federal funding, state resources and a ‘yes’ mindset to reach that goal.

It's time to properly address our housing crisis with determination and speed that matches the urgent need to provide more housing for Australians,” he said.

The Interest Rate Conundrum

Interest rates have a direct impact on the housing market.

When rates are low, borrowing is cheaper, and developers are more inclined to invest in new projects.

However, the current economic climate has seen a steady rise in interest rates, which is putting the brakes on new housing developments.

Higher interest rates increase the cost of borrowing for developers, making it more expensive to finance new projects. This added financial burden is a significant deterrent, leading to a slowdown in housing starts.

For homebuyers, high interest rates mean higher mortgage repayments, which reduces their purchasing power.

This, in turn, affects the demand for new homes. With fewer buyers in the market, developers are less motivated to build, leading to a further reduction in the supply of new housing.

The Construction Cost Crisis

Alongside rising interest rates, the construction industry is grappling with soaring costs.

According to recent data from the Australian Bureau of Statistics (ABS), construction costs have been climbing at an unprecedented rate.

This is driven by a combination of factors, including supply chain disruptions, labor shortages, and increased prices for raw materials.

The cost of building a new home has skyrocketed, making it financially unfeasible for many developers to proceed with planned projects.

Impact on Housing Supply

The dual impact of high interest rates and rising construction costs is evident in the latest building activity data which showed a significant decline in the number of new dwellings approved and commenced.

This trend is worrying, as it indicates that the supply of new homes is not keeping pace with the demand.

The consequence is a tightening of the housing market, with fewer new homes being built and an increasing gap between supply and demand.

Clearly if these trends continue, the national target of 1.2 million new homes over five years will be unattainable.

The government’s ambitious housing targets are becoming increasingly difficult to achieve in the current economic environment.

Without a substantial increase in housing supply, the pressures on the housing market will only intensify, leading to higher prices and reduced affordability for Australians and the continuation of skyrocketing rents.

Solutions and the Way Forward

To address this crisis, a multi-faceted approach is required.

Firstly, there needs to be a concerted effort to stabilize and reduce interest rates.

While this is largely dependent on broader economic conditions, targeted policies to support the housing sector could help.

For instance, government-backed loans or incentives for developers could mitigate some of the financial pressures caused by high interest rates.

Secondly, addressing the construction cost crisis requires a focus on improving supply chain efficiencies and increasing the availability of building materials.

Investment in local manufacturing and the removal of trade barriers could help reduce reliance on volatile international markets.

Additionally, training and upskilling workers in the construction industry can alleviate labor shortages and boost productivity.

Lastly, innovation in construction methods and materials can play a crucial role.

Embracing new technologies, such as modular construction and sustainable building practices, can help reduce costs and improve efficiency.

These innovations can make housing development more viable, even in the face of rising costs.

Conclusion

The cost of construction in capital cities has risen at a faster rate than house price growth, making it less economical to build new dwellings and despite all the rhetoric, it's unlikely anything will change quickly.

This means there is currently a window of opportunity for property investors to get into the market buying properties considerably below replacement cost.

However, not all properties will increase in value the same, so careful investment property selection is critical.

Similarly, homebuyers should not wait for the ideal time, home prices will never get any cheaper.

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.