- HIA economist warns that home building in Sydney and Melbourne will be hit hardest.
- Significant slowdown in detached home building, commencements at a decade low.
- Housing markets face challenges as interest rate rises conflicts with the Government's goal of increasing supply.
Sydney and Melbourne are expected to bear the brunt of the Royal Bank of Australia’s (RBA) latest cash rate target hike, according to the Housing Institute of Australia’s (HIA) chief economist, Tim Reardon.
Reardon’s comments came in tandem with the HIA’s latest economy and industry outlook report, published today.
The report contained revised projections for new home building and renovation activity nationally and for each of Australia’s eight states and territories.
Home building activity expected to spiral
“The RBA’s rate increases are yet to adversely impact the lagging indicators of economic activity like unemployment or inflation, but they are impeding future home building activity,” Reardon said.
“Leading indicators of home building activity, including approvals and lending, have fallen sharply to decade lows and have remained at these levels for most of 2023.
“This will flow through to a significant slowdown in detached home building in 2024, producing the lowest level of new commencements in more than a decade and keeping apartment construction suppressed.”
HIA forecast – Australia
Indeed, HIA data indicated that detached house builds fell in 2022/23 to 109,890, a 22.1% decrease from the 2021/21 peak.
Additionally, detached house commencements were predicted to fall by another 10.9% in 2023/24, potentially making it the most sluggish year since 2012/13.
Commencements were expected to stabilise in 2024/25, recovering moderately in the following years, and exceeding 110,000 by 2026/27.
Multi-unit builds also slumped in the June Quarter of 2023, with 62,290 commencements, the weakest since 2011/12. To put this into perspective, this year’s activity was almost half of the annual highs seen during the 2015 to 2018 apartment surge.
Multi-unit starts were anticipated to rise by 22.3% to 76,160 in 2023/24 and an additional 19% in 2024/25, staying above 90,000 for the rest of the forecast period.
Cash rate target increase at odds with push for more supply
“This low volume of new home commencement is at odds with the goal of increasing the supply of housing stock, especially in the tight rental markets of Sydney and Melbourne,” Reardon added.
“The higher costs of delivering a new house and land package, or a new apartment, in Sydney and Melbourne is resulting in a greater impact from the rise in the cash rate in these areas.
“Interest rates helped drive a boom in building through the pandemic, and a return to a stable market isn’t likely given the subsequent rise in the cash rate.”
Tim Reardon, HIA Economist
“House building activity is set to slow in all regions, except for Western Australia, under the weight of rising interest rates,” Reardon said.
“There remains a significant volume of building work still to be completed, and as this occurs, home building will drag on economic growth and push unemployment higher.
“The cost of building materials and labour is stabilising on this side of the pandemic, but they are not likely to fall substantially.
“Increasing the volume of new homes commencing construction against the rising cost of borrowing will require governments to lower the cost of shovel-ready land, attract more investment, especially from overseas and reduce tax imposts.”