Surging construction costs stall residential builds

KPMG urban economist Terry Rawnsley said the trend was due to both the 30 per cent surge in residential construction costs and stalling property prices across Sydney and Melbourne.

“Property developers are shelving projects because of soaring costs and lacklustre property prices. Some are even going bust,” Mr Rawnsley said.

“Both Victoria and NSW have increased demand for new dwelling approvals, but dwellings are far from materialising due to significantly higher input costs and a potentially lower return on investment.”

KPMG’s analysis comes after a report by the National Housing Finance and Investment Corporation (NHFIC) last month forecast a shortfall of approximately 106,000 dwellings over the next three years.

“Slowing supply, together with increasing household formation, is expected to lead to a supply-household formation balance of around -106,300 dwellings (cumulative) over the five years to 2027 (and around -79,300 dwellings over the projection period 2023–33)”, said the NHFIC.

“NHFIC continues to expect a shortage of apartments and multi-density dwellings for rent over the medium term. Net additions of apartments and medium-density dwellings such as town houses are projected to be around 57,000 a year (on average) over the five years to 2026–27, around 40 per cent less than the levels seen in the late 2010s.

“In addition to higher interest rates, supply of new housing continues to be impeded by a range of factors, including the availability of serviced land, higher construction costs, ongoing community opposition to development and long lead times for delivering new supply.”

KPMG said NSW and Victoria were the worst affected while Queensland and Western Australia were holding steady amid the residential construction slowdown since house prices in those states had remained more robust.

Mr Rawnsley said Queensland and Western Australia were also protected from the decline due to their lower proportion of new medium and high-density dwellings, which tend to be more sensitive to cost increases.

Despite construction prices forecast to ease across NSW and Victoria, Mr Rawnsley said the trend is unlikely to reverse any time soon.

“With increases in construction prices starting to moderate and property prices in NSW and Victoria stabilising, the rapid increase in dwellings not yet commenced is starting to slow,” said Mr Rawnsley.

“These not-yet-commenced dwellings represent a pool of approved homes, which can be quickly delivered when market conditions improve.”

[Related: Housing shortfall expected to worsen: NHFIC]