Is construction uptick easing housing challenges in Australia?

NAB and CoreLogic point to early signs of recovery in Australia's construction sector

Is construction uptick easing housing challenges in Australia?


By Mina Martin

Data up to the end of last year suggests the Australian construction sector is beginning to recover, with dwelling approvals on the rise and construction costs decreasing, according to a join report by NAB and CoreLogic.

The NAB-CoreLogic report, titled The Australian Housing Accessibility Challenge, said the shift could mark a significant step towards addressing the nation’s housing challenges.

The road to meeting housing targets

Despite these positive signs, Eliza Owen, CoreLogic’s head of residential research, stressed that achieving the federal government’s housing target by 2028 remains a daunting task.

“Despite the recent normalisation in construction metrics, we will need to see a substantial comeback over the five years from July to reach the federal government’s ambitious target of 1.2 million well-located homes.”

Currently, annual dwelling approvals and completions fall short of the necessary target, needing an average completion of 240,000 dwellings each year.

Approximately 173,000 homes were finished in the 2022-23 fiscal year.

Momentum for affordable housing

In a forum last November on community housing, Cathryn Carver, NAB Affordable Housing Council chair, said the next two years is crucial for expanding the affordable and specialist housing sector.

“People want to get cut-through, and that desire is greater than I’ve ever seen before,” Carver said.

“Institutional investors, of course, want to make a return but because the need is so great, they’re being more thoughtful and creative, and governments want and need to get involved, so I do think we’ll see momentum in 2024 and 2025.”

During the forum, there was noticeable enthusiasm within the sector, yet institutional investors continued to seek typical returns on their investments. This objective has often been met by incorporating a minor social component, like allocating 10% of a development project for build-to-rent units, into their overall investment strategies.

“We have to flip this around so that the social impact is much larger,” Carver said.

NAB has explored and adopted various strategies to reduce transaction risks, facilitating more affordable financing.

Carver also praised the initial funding round for the Housing Australia Future Fund and the National Housing Accord as transformative, aiming to spur the creation of 40,000 social and affordable homes.

NAB Group CEO Ross McEwan (pictured above) frequently highlights housing as a major national issue, disproportionately affecting the younger and more vulnerable populations without proper adjustments.

In the report, McEwan noted that housing affordability is at its lowest in 30 years, with a swift rise in rents due to a shortage of homes for Australia’s expanding population, and a critical lack of affordable and social housing for those in need. The annual shortfall between housing supply and demand has expanded significantly, reaching approximately 50,000 homes.

“All levels of government urgently need to collaborate on simpler and faster regulations, while freeing up suitable land for building,” he said.

“There also needs to be more targeted government support for social and affordable housing and more innovative construction methods to meet supply targets, such as modular housing.”

The NAB boss said the bank aims to contribute by providing an additional $6 billion in lending for affordable and specialist housing by 2029.

The number of dwelling completions has been declining since the September quarter of 2018, with a total of 173,993 homes completed in the year leading up to September last year.

Typically, a strong link exists between approvals and completions, usually with a nine-month delay. However, despite an increase in approvals from June 2020 to June 2021, there was hardly any noticeable rise in completions up to the end of 2023.

Construction challenges and solutions

Mark Browning, NAB’s head of valuations and property advisory, attributed this discrepancy to extended construction timelines.

“The challenge to secure labour for the construction industry, considering the significant infrastructure builds underway across most states, remains significant, with both training and targeted immigration on the horizon having the potential to assist,” Browning said.

“Without larger scale projects that are feasible from a cost perspective, cumulative dwelling sale price and ability to construct, the supply response that is needed to address the challenge is constrained.

“As noted, solutions are not simple or singular and will take time to show benefits.”

The ability to complete a large number of approved dwellings was also constrained by increasing insolvencies within the construction sector (though starting from very low levels) and diminishing profits for construction companies, many of which operated under fixed contracts.

The Reserve Bank’s recent financial stability review revealed that construction firms accounted for a sharply increasing 30% of company insolvencies in August of the previous year. Additionally, approximately one-third of large home builders were operating at a loss as of March 2023.

On a positive note, CoreLogic reported that the rise in construction costs is stabilising, with an increase of just 2.9% in 2023.

Given the relatively low number of dwellings approved for construction last year, the residential construction industry may now focus on completing its existing pipeline of projects, which has already begun to show signs of becoming less congested.

“Construction costs are expected to continue rising at around historic average levels, with inputs like steel even showing a mild reduction in price,” Owen said. “Capacity more broadly in the construction sector is expected to increase, which will be aided by an expected lift in the unemployment rate.”

To meet the ambitious goal of constructing 1.2 million dwellings in the next five years, the CoreLogic researcher said significant efforts are required.

“Upskilling labour for construction, rezoning parts of our cities for higher density, and diverting more resources to work through existing pipelines could all help make this ambitious target more realistic, as the construction sector finds some normalcy in 2024,” Owen said.

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