Australian housing rebound in sight as building costs fall for the first time in five years

For the first time in nearly five years housing construction costs have fallen.

Not by a lot — down 0.3 per cent in the December quarter — but a welcome change after years of rising inflation.

No-one is singing from the rooftops yet, but a critical component of the cost of living in Australia is starting to show green shoots.

The materials bottleneck cleared 18 months ago, but a persistent shortfall in labour had been keeping prices elevated.

The worker shortage is still a problem but no longer as acute.

The shift in pricing marks a turning point, according to Tom Devitt, senior economist at the Housing Industry Association, who notes that house construction costs have been persistently high even as material costs stabilised.

“Even though those materials input prices have come back to more normal growth rates, house output prices were still increasing quite strongly, at around 5 per cent a year,” he said.

The December quarter drop, however, signals that pressures may finally be easing.

“The fact that house output prices have now come down so sharply, finally, after they remained persistently elevated compared to input prices for the last few quarters—that is very good news,” Mr Devitt said.

While the problem is far from solved, he believes the recent trend should improve confidence and encourage more people back into the housing market.

One key factor helping to ease labour pressures has been the recent slowdown in large infrastructure projects. The intense demand for workers from major transport and energy projects has long contributed to labour shortages in residential construction, pushing wages and costs higher. But governments are now adjusting their infrastructure spending schedules to help free up resources, according to Pradeep Philip, Lead Partner at Deloitte Access Economics.

“One of the big things we have found over time is there’s been a lot of crowding out … big construction of roads and bridges and airports has sucked in workers out of normal housing construction,” he said.

“What we’re seeing is a number of State governments re-phasing some of their big infrastructure projects to try and deal with the supply constraint a little bit better.”

This adjustment is expected to provide some short-term relief to the residential sector, allowing more skilled workers to shift back into housing construction.

While the easing of cost pressures is a positive sign, the long-term challenges for the construction industry remain significant.

“The problem isn’t solved, but the fact that those labour costs are no longer increasing as fast as they were in recent quarters makes us a lot more optimistic,” he said.

Mr Devitt warned Australia still faced an acute shortage of skilled tradespeople, with an additional 83,000 workers needed to meet demand.

A major barrier to increasing housing supply remains this workforce gap, which required a dedicated visa stream to attract more construction workers.

“In the short term, it’s going to require better access to skilled labour from overseas. The visa system at the moment is very, very difficult and complicated, so a dedicated skilled trades visa is definitely needed in the short term,” he said.

Mr Devitt said it was too simplistic to blame immigration for Australia’s housing shortages, noting that governments have consistently underestimated population growth for decades, and failed to plan adequately for housing supply.

“Australia’s government, State and Federal, have consistently under-forecasted, what Australia’s population growth was going to be over the last few years, and in fact, decades,” he said. While migration does contribute to demand, the underlying issue is the failure to ensure planning systems, infrastructure, and workforce capacity keep pace with population growth, he said.

That supply-demand mismatch, along with shortages of labour and materials has contributed to construction costs 45 per cent higher than before the pandemic, Deloitte found.

While house construction costs are now rising at just one-fifth of the pace seen in 2022, the cost of delivering townhouses and apartments has barely slowed, and completion times for new apartments have stretched from two years in 2015-16 to almost three and a half years in 2023-24.

This has weighed on developer profits and eroded industry capacity, though there are signs of recovery, with new business entries balancing out a wave of insolvencies.

Deloitte forecasts construction to be one of the key drivers of the economy in the next five years, as sector tries to deliver the 1.2 million homes targeted in the Government’s housing plan.

Over the longer term, investment in apprenticeship programs and training incentives will be critical to to meet ongoing demand,

The HIA has welcomed the Government’s recent incentive scheme to attract more apprentices to the sector to secure a sustainable pipeline of workers. In it’s pre-budget submission the HIA has also proposed a $12 billion infrastructure investment over five years to accelerate land supply and unlock critical housing development.

“The average cost of a house-and-land package in major cities is now $1.3 million, making home ownership unattainable for many Australians,” said HIA Managing Director Jocelyn Martin.

“The lack of essential infrastructure is a handbrake on housing supply, and this Budget must take steps to prioritise infrastructure funding to fast-track projects and make land ready for development.”