Construction Industry Woe Likely To Keep House Prices High

All data coming out about the construction industry shows ongoing challenges. Construction costs are up nine per cent, the highest rate recorded excluding the year the GST was introduced. Construction industry insolvencies are up 30 per cent over 12 months. And with migration only just starting up again, we have a shortage of construction workers. Supply chain blockages, the war in the Ukraine and bushfires in 2019/20 are all impacting the sector and it will take some time for all of these issues to be resolved.

Since the start of the year, we have seen a softening in house prices. The medians in Sydney and Melbourne have pulled back a bit while elsewhere price growth is slowing. Add in the first of many expected interest rate rises after two years of the strongest level of price growth ever recorded, you would normally expect prices to continue to stabilise or fall for established homes for the remainder of the year. However, this ignores both the complexity of the housing market and how more expensive construction costs influence house prices.

Rising construction costs mean that fewer homes will be built. This is partly because of the difficulty in accessing both materials and labour – homes that are in the pipeline to be built will be delayed, in some cases indefinitely. This makes a new home more expensive. The slow down in getting a new home and rising construction costs will also mean that people who would have otherwise looked at buying a new home will look to the existing market.

Rising demand for existing homes from owner-occupiers is coming at a time when we are also having increased demand for rental accommodation. Unlike house prices which are influenced by interest rates and are slowing as a result, rents are going up and will continue to increase with international borders reopening and migration starting up again. There will be a battle for accommodation between owner-occupiers and renters.

The best way to fix housing affordability is to ensure that there are enough homes for people to live in. With construction industry challenges, housing supply will be impacted, resulting in rising prices and rising rents.