Home Insights New construction approvals continue to fall. What’s behind the home-building slump?

New construction approvals continue to fall. What’s behind the home-building slump?

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For the second straight month, approval to build new homes has been lowered, and there is one major factor driving the slump.

The latest building approval release from the Australian Bureau of Statistics shows that the number of approved homes has decreased by 2.4% month-on-month.

The main reason for this is a 6.1% decrease in approvals for apartments and semi-detached apartments.

However, a closer look at the data reveals that this trend is not recent. In fact, approvals have declined since their peak in March 2021.

Comparing the last 6 months (November 2020 to April 2022) with the last 6 months (May 2021 to October 2021), housing approvals have decreased by 14%.

The construction industry is facing a difficult situation due to record high input costs. But what is causing this?

There are several factors.

First, the government’s HomeBuilder scheme, coupled with historically low interest rates, has led to an influx of demand as many Australians try to build new homes.

The Homebuilder scheme has increased demand in the construction industry.Photo: Getty

This exacerbated the labor shortage in the industry and pushed up employment and subcontracting costs.

Second, there is a shortage of major building materials. Due to the outbreak of COVID-19 around the world, factories and ports were closed, production was restricted and transportation was delayed.

These supply chain constraints are driving demand for available inventories and soaring prices. For example, structural material prices rose 34% from the March 2021 quarter to the March 2022 quarter.

Overall, the ABS Producer Price Index shows that homebuilding input costs have increased by 15% over the past year.

Labor and equipment shortages also lead to project backlogs, requiring companies to delay construction or put it on ice.

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This situation has discouraged many developers from starting construction projects.

The decline and delay in demand is also evident in the 10% year-on-year decline in active construction projects across the country.

Housing and apartment construction is expected to be more expensive for some time to come, as the HomeBuilder scheme is abolished, interest rates are expected to rise further, and investment costs are not expected to fall in the short term.

In the short term, developers and their mid-builds will continue to face challenges and delays.

However, in the long run, cost pressures are expected to ease and more projects are expected to be launched.

However, there is considerable uncertainty as to when these favorable conditions will return.

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