Residential construction future appears bleak after record interest rate rises: HIA
Residential construction is entering a downturn as consumer appetite for housing dampens on the back of consecutive interest rate hikes, putting strain on supply.
Slumps in mortgage lending and dwelling approvals are set to strangle supply over the coming months as the industry recalibrates to depressed conditions and migration picks ups and puts more pressure on demand.
The Reserve Bank moved to lift rates by a further 0.25 per cent on Tuesday, the 10th consecutive increase of the cycle. But Housing Industry Association chief economist Tim Reardon does not believe the pullback by consumers is reflective of a direct hip-pocket hit.
“It is coming, but as yet, the response was saying the demand for home building has largely been sentiment-related, not their capacity to get there,” he said last week at the group’s Brisbane Outlook event.
“We do have a problem, which is their capacity to get a loan. As a consequence, we get this scenario: people with a 5 per cent, 10 per cent, 20 per cent deposit are being forced out of the market.”
Data from The Australian Bureau of Statistics released in the past week paints the picture of a housing construction slump after a period of fevered activity through the pandemic.
Lending indicator data released last Friday revealed a 35 per cent year-on-year fall in new mortgages being taken out through January. Just 4345 loans were issued for the construction or purchase of a new home in January, the weakest month since November 2008.
Building approvals for detached homes fell 12 per cent compared to 12 months ago, while multi-unit approvals in January declined by 8.4 per cent.
The last time detached house approvals hit these levels coincided with the Reserve Bank decreasing rates in June 2012.
Mr Reardon explained that the traditional economic correlations between approvals and commencements have been out of sync for several years because of the volume of work in the pipeline, with the number of homes approved but not yet commenced significantly outnumbered by homes sold and not yet approved.
“The industry has been quite constipated and it appears that through until the end of last year, completions were still less than commencements,” he said.
“This year, that’s not going to be the case; you’re going to finish more homes than you start.
“By March, I expect the building approvals numbers … that volume of work in the pipeline will be back to pre-Covid, pre-pandemic-type numbers, and all those correlations will start returning.”
Large-scale volume home builders in Sydney and Melbourne are likely to feel the slowdown acutely, with boutique builders to be mostly unaffected.
Mr Reardon expects Queensland, in particular, will experience a pick up in medium and high-density housing over the coming decade as the city prepares for the 2032 Olympics. However, this will not address the shortage of homes in the region.
“There needs to be an enormous investment in infrastructure, and that comes with positives for this industry,” Mr Reardon said.
“But I don’t think that an Olympic Village is going to solve the affordability constraints or supply shortages for southeast corner of Queensland. Definitely not for north Queensland, but it does provide a really nice line in the sand for governments to set out for their plans.”