Surging construction costs are causing Australian developers to pause thousands of development projects, despite already gaining planning approval, according to KPMG Australia. The slowing building pipeline will, in turn, likely exacerbate already tight rental markets.
KPMG’s analysis found almost 16,400 dwellings in New South Wales were approved for construction in March this year but have not commenced.
This figure was 13,800 a year earlier.
The situation is even worse in Victoria, with 10,500 dwellings with planning approval yet to start construction – more than double the number in March 2022.
Three-quarters of these projects yet to break ground are designated to be apartments or townhouses.
KPMG urban economist Terry Rawnsley said developers were delaying projects after residential construction costs increased 29% in Sydney and 32% in Melbourne between March 2020 and March 2023.
“Some are even going bust,” he said.
“Both Victoria and New South Wales have increased demand for new dwelling approvals, but dwellings are far from materialising, due to significantly higher input costs.”
Building approvals fall to 11-year lows
The news comes as recent Australian Bureau of Statistics data showed an 8.1% monthly drop in total building approvals in April to 11,594 – an 11-year low.
The Housing Industry Association warned that further declines were expected in the coming months, due to several factors including increased construction costs, higher interest rates and labour uncertainties.
Tom Devitt, HIA Senior Economist said the slowing rate of construction was likely to exacerbate Australia’s housing shortage.
“These disappointing approvals numbers are occurring as population growth surges with the return of overseas migrants, students and tourists,” he said.
“This imbalance will see the affordability and rental crisis deteriorate further.”
Demand outweighs supply
But while construction activity is slowing in Australia, demand for housing remains high with annual population growth of 1.6% over the year to September 2022, and the rapid return of overseas migration.
All these people need somewhere to live.
However, as the AMP Capital graph below shows, construction levels are tracking well below population growth, leading to a shortage.
To make matters worse, Australian households are also getting smaller – with recent Census data showing the average number of people in each household declined to a historical low of 2.5 people per household in 2021.
What’s more, the situation is unlikely to improve any time soon, with the National Housing Finance and Investment Corporation recently forecasting a shortfall of more than 106,000 homes over the five years to 2027.
Pressures mount in Australia’s property and rental markets
Australia’s nationwide vacancy rate was just 1.1% in April, well below the decade average of 3.0%, according to the ANZ CoreLogic Housing Affordability report.
Those ultra-tight market conditions were driven by a massive fall in supply, with total rental listings in April down 38.1% when compared to the previous decade average.
With would-be tenants facing fierce competition for leases, asking rents have soared – with CoreLogic reporting growth of 11.7% in the combined capital cities in April, the highest annual increase on record.
It’s not just Australia’s rental markets that are feeling the strain, either.
Demand is outweighing supply in many of the country’s property markets too, with CoreLogic’s national home value index recording its third consecutive monthly rise in May, despite high interest rates.
CoreLogic’s Research Director, Tim Lawless, said the positive trend was a “symptom of persistently low levels of available housing supply running up against rising housing demand.”
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