Urgent action needed to double down on home building

Eleanor Creagh
Eleanor Creagh

Planning and zoning restrictions have made it tough to deliver on the number of homes we need in the right locations. But reforms alone won't address the acute challenges that are contributing to persistent undersupply.

In the immediate term, unless we can ease construction capacity constraints and cost pressures, delivering enough new houses or apartments will be difficult and we will continue to see the housing and rental crisis worsen.

The residential construction industry has been challenged by capacity constraints and higher costs, and consequent tight housing supply is flowing through to both prices for existing homes and the rental market.

Rental vacancy rates are not far off record lows in most markets and rental prices have surged 42% across the capital cities and 41% in regional areas since the pandemic onset.

Over the past four years, rental vacancies have more than halved (-58%) across the capital cities and almost halved (-47%) in regional areas.

The data underscores a chronic shortage of housing, which, combined with Australia's continuing population growth, is expected to further drive up record-high house prices and rents.

Increasing the supply of housing is one factor in curbing the decline in affordability that poses challenges for so many.

Many have pointed to the need to reform planning and zoning restrictions to unlock more housing supply and fast track approvals.

Planning and zoning reforms are not the only solution to Australia's housing shortage, according to PropTrack senior economist Eleanor Creagh. Picture: Getty

Victoria is streamlining planning and permitting processes, and the NSW government recently announced extensive reforms to help fast-track approvals for well located middle-density homes.

But an easing of planning restrictions isn’t the only factor that needs to be addressed to solve housing shortages.

New builds sidelined as higher input costs squeeze developers

Unfortunately, the supply side of the housing market has fallen short in responding to substantial demand.

Residential approvals and commencements are both at their lowest in over a decade according to the latest data from the Australian Bureau of Statistics (ABS) as industry-wide pressures weigh.  

However, to understand some of the acute issues compounding the housing shortage we need to look at the data on how many approved homes are actually built.

There is a pipeline of homes that have been approved for construction where work is yet to commence.

At present, close to 1 in 5 approved homes are not flowing through to completions, which is a bigger drop off than has been seen throughout the past decade.

This larger attrition between proposed homes and completion in part reflects a backlog due to the slowed pace of building.

But it’s likely that, given it’s harder to make feasibilities stack up due to labour and skills shortages and higher building materials and financing costs (in particular for multi-density projects) that many developments are being cancelled or postponed.

Subdued activity in the off-the-plan apartment market and lower pre-sales rates are also hindering the feasibility of new projects.

Developers bringing new stock to market will only do so if they are confident they can meet their internal rate of return hurdle.

That means a project may be shelved because higher labour, materials and financing costs compress margins result in a potentially lower return on investment.

Despite being approved, projects that are no longer feasible due to cost increases typically will not proceed.

Skilled labour shortages and an uptick in insolvencies across the building industry have also slowed the commencement of new builds adding further pressure resulting in projects being shelved.

As a result, the value of completed projects is failing to match proposed work by a larger than usual amount and these not-yet-commenced dwellings represent a large number of approved homes which need to be delivered.

Barriers hindering homebuilding need to be addressed not just at the approval and planning phase, but right through to completion.

Planning and zoning reforms will not help with immediate challenges like capacity constraints, high materials costs, and financing costs.

Why we need to almost double building activity

We’re currently completing just under 170,000 new homes a year and commencing even fewer, which is below the prior decade average, and declining approvals are signalling that’s only going to get worse.

Using the recent estimated attrition between approval and completion, that annual completions figure could trend towards 140,000 unless something changes.

That would be just over half of the 240,000 homes a year that need to be built to meet the goal of 1.2 million new homes by 2029, which is further outweighed by the number of new homes required for new arrivals if average household sizes stay the same.

That means we’re undershooting the target by around 40%, but if completions continue trending lower, an almost 80% increase in building activity would be required to meet the 240,000 target.

Given the constraints hampering the construction sector, it is hard to imagine doubling capacity and fast-tracking construction to deliver these homes fast enough. There is an urgent need to enhance the building industry's capability to provide these homes.

The good news is pressures like higher building and finance costs have stabilised, albeit at a higher level.

Interest rates remain on hold and are expected to begin moving lower late this year or early next, Additionally, the continued upturn in home prices allows better pricing conditions to rebuild margins. Both factors that could act as a catalyst for green shoots.

However, the chronic undersupply of housing worsened by current constraints, is leading to a continued deficit that market forces alone are unlikely to resolve.

Incentivising and facilitating greater supply of new homes

The construction shortfall means there will likely be an ongoing shortage of new builds and homes to rent, with a prolonged imbalance between the flow of supply and housing demand likely to further pressure affordability for renters and buyers.

These challenges require quick address beyond planning and zoning reform to stimulate investment.

Labour shortages remain a critical issue, underscoring the need for targeted migration policy to address skills shortages and meet the high demand for labour in the construction sector. In fact, continued labour shortages for skilled trades are a primary driver of ongoing price increases.

A combination of measures are needed to address worsening housing supply. Picture: Getty

Reintroducing stamp duty incentives for new homes could also drive the pipeline of proposed and new construction forward and encourage new homes and new rental stock to be delivered more quickly.

Replacing stamp duty with an annual land tax and encouraging downsizing are also ways to better utilise existing housing stock helping to alleviate the housing shortage.

Industry productivity, innovation and advanced manufacturing techniques also play a role. By arresting the construction industry productivity decline seen over the past five years and enhancing productivity, existing industry output can be increased.

Addressing these issues hindering the expansion of housing supply could facilitate a faster supply increase and help put the brakes on the housing crisis.

As the population grows, a combination of aiding new supply and policies that encourage better use of existing homes can help ease supply constraints.

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