How rising construction costs and higher interest rates have impacted Australian property markets

Australia’s construction industry was hit by a perfect storm during the pandemic, when a huge spike in demand coincided with material and labour shortages.

Unsurprisingly, the resulting supply-demand imbalance saw building costs skyrocket, with CoreLogic’s Cordell construction cost index ending the 2022 calendar year 11.9% higher than the previous year, the largest annual jump on record.

Several high-profile construction companies collapsed under the pressure, despite high levels of demand, in what’s become known as a ‘profitless boom’.

While material costs have finally started to ease, higher interest rates are now forcing buyers and developers out of the market.

Figures from the Australian Bureau of Statistics show the total number of dwellings approved in January was the lowest in over a decade.

As the graph below shows, the declines were broad-based:

●       House approvals fell 13.8% in monthly terms and 12.0% in annual terms

●       Multi-unit approvals fell 40.8% in monthly terms and 0.3% in annual terms

Housing Industry Association (HIA) senior economist Tom Devitt said this won’t be the end of the decline in approvals, with the adverse impact of last year’s cash rate increases still to fully flow through to the official data.

“The higher cash rate is compounding the adverse impact of the rising cost of materials, labour and land as well as the increased costs of compliance with the building code,” he said.

What does this mean for Australia’s property markets?

The HIA forecasts that fewer than 100,000 properties will be built this year, which is a low number given that Australia’s property and rental markets are grappling with a supply-side crunch.

You can see the impact of this most clearly in Australia’s national vacancy rate, which remained at its lowest point on record in February, at 0.8%, according to Domain.

To put that in perspective, only eight out of every 1000 rental properties were untenanted last month. Ultra-low vacancy rates are pushing up asking rents, with national rents rising 17.4% over the year to 12 February, according to SQM Research.  

In the wider market, Australia is already facing a projected shortfall of 163,400 homes by 2032 as household formation exceeds supply, according to the National Housing Finance and Investment Corporation.

The fewer homes built, the more it will put upwards pressure on property prices and rents.

Looking to buy a quality home or investment property? As an expert buyer’s agent, A Game Property Advisory can help you secure the best property at the best price. Get in touch with Jim by calling 0422 446 170 or emailing jim@agameadvisory.com.au.