Building a new home has traditionally been a pathway to achieving the Australian dream. However, this dream seems to be fading amidst escalating cost-of-living pressures, coupled with increasing costs of building. The recent CoreLogic Cost Construction Index report shows a daunting result; a 26.6% increase in construction costs across Australia since the COVID-19 pandemic’s onset, with materials such as timber and metal experiencing fluctuations.
While the rate of increase is slowing nationally, Victoria recorded the largest quarterly increase in construction costs amongst states over the December quarter, at 1.1%. Despite the general slowing, the burden to build remains significant.
Supply Chains and Labour
The state of construction costs is complicated by unstable supply chains, impacted by global events such as the pandemic, the Russia-Ukraine war, and trade tensions.
Essential materials’ availability and affordability are disrupted due to these events, adding to project delays, and cost overruns.
Exacerbating the issue is the shortage of skilled labour, much of our construction labour force has been consumed by major infrastructure projects. Additionally, we have a growing population, wherein construction workers are not growing at the same rate. In the year to March 2023, Australia’s population grew by 563,200 (454,400 of which were migrants), however, migrants are less likely to work in construction than most other industries. Migrants who arrived in Australia less than five years ago account for 2.8% of the construction workforce, but account for 4.4% of all workers in Australia.
Coupled with several building companies collapsing in recent times, the issue is exacerbated even further, as it leaves projects in limbo, and pushes wages higher.
Weighing the Options: Red Tape, Risk Aversion and Buying Established.
In past years when there has been a lack of housing supply, developers would often be delayed by planning and building red tape. However, Victoria’s Housing Statement seeks to foster conditions to build high-quality homes quickly, by addressing some of the red tape issues.
With large goals of building 80,000 new homes per annum each year for the next ten years, the government are hoping new provisions such as the introduction of Small Second Dwellings will help ease the housing crisis.
However, the building industry lacks the capacity to build this many homes, and there is a deeper challenge – risk aversion. Both developers and aspiring homeowners do not have sufficient incentive in the current market and construction climate to embark on new builds – existing dwellings are likely to be more attractive, if you can find the right one up for sale!
To demonstrate this, take an example of a theoretical new dwelling on a greenfield lot. There can clearly be a wide range of lot values based on size and location and even more variation in the costs of building a home, but as an example;
- A parcel of land on the outskirts of Melbourne may cost approximately $300k.
- Plus, a new house, fully built and fitted, could cost approximately 500k.
- However, for $800k you are likely to get a pretty good quality existing home within the same suburb.
This means in the current climate, existing homes often hold the upper hand. Buyers can avoid the construction wait time of 12-18 months, and not have to wear the risks of cost and timeline blowouts, or a builder going bust!
Existing homes will likely hold their value, and it’s expected this value will rise due to the underlying demand. In the meantime, the number of dwellings being constructed is not keeping up with the underlying demand.
Embracing Change and Opportunity
As a land development consultancy, we see these challenges firsthand. Clients, both potential homeowners and developers, are understandably hesitant to commit to new projects.
However, the future is not bleak, with positive steps towards easing housing supply issues through initiatives such as Victoria’s Housing Statement. Alternative building methods and smaller, more affordable projects could be the key to unlocking new opportunities for many Australians.
More than ever before, selection of project partners will be key to the success of development projects. There are still plenty of good builders who haven’t pulled up stumps or joined the infrastructure workforce.
At Millar Merrigan, we remain committed to sustainable land development practices. Through open communication and realistic expectations, we’re committed to working closely with clients to navigate the complexities that the market presents, and find solutions that are feasible and sustainable.
Are you looking to undertake a new development, or want to know more about the current state of the industry and how this may fit in with any plans you have? Get in touch with our team of experts for a chat today.
