Why the growth in building costs has eased

One of the country’s leading property economists has declared the residential construction crisis is just about over, which should have a positive impact on the property market.

Ray White Group Chief Economist Nerida Conisbee said the rise in building costs – which peaked at 21% per annum in July 2022 – had made it more expensive to build homes and contributed to a reduction in homebuilding activity, which in turn had affected rents and prices.

“Last year, Australia’s population increased by 500,000 people, requiring around 200,000 additional homes. Only 172,000 were built,” Ms Conisbee said.

“This imbalance between supply and demand showed up quickly in rental growth in 2022 but by the start of 2023, it was also driving up house prices. Too few homes led to a shortage of rental properties, further exacerbated by a drop in household size during the pandemic. House prices never saw a catastrophic drop in prices as some predicted, primarily because of housing shortages – many renters decided to become buyers and a shortage of new homes pushed more into the established home market.”

So Ms Conisbee said it was good news that the growth in construction costs was starting to return to more normal levels. But why has this happened?

One big reason is that the supply chain blockages, which made it harder and dearer to access building materials, have now eased. Supply chains are now operating smoothly and the cost of materials has fallen, according to Ms Conisbee.

Another reason is that labour shortages are being addressed by high migration, although that is also putting more pressure on housing demand.

On the flipside, a lot of building companies have become insolvent, which has reduced competition and therefore put upward pressure on prices.

“Moderating construction costs are already leading to higher building approvals. Dwelling approvals are still very low but increased by 7% in August,” Ms Conisbee said.

“Renovations are also starting up again and the value of alterations and additions approved for homes is now getting close to where it was during the 2021 peak.”

Thinking of building a new home or renovating an existing home? It’s a good idea to lock in your finance at the start of the project, so you know exactly what your budget will be. Your Loan Market broker can help you secure a construction loan to suit your situation.

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