Apartments and townhouses hardest hit as developers opt for detached home builds that offer ‘much less uncertainty’
Developers are holding off building tens of thousands of homes across Australia, despite already gaining planning approval, largely because of surging construction costs, with apartments and townhouses the majority of those shelved.
The problem is most pronounced in Victoria, where paused housing projects have almost doubled, according to analysis by KPMG.
About 10,500 dwellings with planning approval were yet to break ground by the end of March. This number was 5,000 a year earlier.
In New South Wales almost 16,400 dwellings with approval had failed to materialise by the end of March – a tally that has increased by 2,600 in the last 12 months.
The stalled construction rate was last at such a high level in NSW in 2019, when developers were shelving projects due to a higher property vacancy rate, which was about 3.5% compared with the current rate of 1.4%.
Medium- and high-density developments account for about three-quarters of the dwellings across Victoria and NSW that have been approved but for which construction is yet to begin.
The KPMG urban economist Terry Rawnsley said the soaring cost of construction in the past three years – which has grown 29% in Sydney and 32% in Melbourne – is causing developers to hold off on certain projects.
“The sticks and bricks, tiles and other input pieces you need to build a home that used to turn up from China in a reliable manner before the pandemic have been disrupted, and due to the stimulus the housing sector has seen in many countries since Covid, there is more demand for those sticks and bricks from around the world.”
Rawnsley said builders had started looking to local companies to supply some of their inputs – which cost more than their imported equivalents.
Global instability has led to increased commodity prices, which in turn has led to fuel price rises.
Labour shortages are also a factor, and housing construction is not the only sector affected. The Albanese government is preparing to axe scores of large infrastructure projects announced by the Coalition.
“All these things have meant input prices have increased by a significant margin, and they’re not looking like they’re going back down … it’ll be a permanent shift,” Rawnsley said, adding that the surge in costs had steadied to increases of 1% to 2% a quarter.
He said repeated interest rate rises had hit the purchasing power of potential homeowners. This meant developers were not able to pass on increased construction costs to consumers in a “lacklustre” market.
To minimise risk, developers had been opting to build more detached housing.
“As an example, two years ago a developer might have looked at building homes, which might have cost them $350,000 each to build but will now cost $500,000. Two years ago, they thought they could sell them for $550,000, but maybe now it’ll only sell for $450,000 or $500,000, so they’ve paused that for the time being.”
“That risk is lower for a house than for a 50-apartment building which they might need to find $30m to build.”
He said the cost of construction and developers’ response was “a real conundrum”.
“With a tight rental market, population growth and a shortfall of housing, you’d think more housing would be coming in but we’ve got the opposite – it’s harder for new supply to come through.”
The KPMG analysis found that Queensland and Western Australia were not experiencing the same trend, which Rawnsley attributed to property prices in those markets remaining “comparatively more robust”.
Source: The Guardian