The Impact of Rising House Building Costs on the Real Estate Market

The Impact of Rising House Building Costs on the Real Estate Market

Introduction
In today’s article, we will discuss the concerning trend of rising house-building costs and its implications for the housing
industry. The recent data from the ABS (Australian Bureau of Statistics) highlights the significant increase in housebuilding
costs over the past year. We will delve into the causes behind these rising costs and explore how they affect
various stakeholders, from homebuyers to builders and the overall economy. Additionally, we will examine the regional
market performance and provide an overview of the latest auction market results. So let’s dive in!

The Rising House Building Costs
The latest data from the ABS reveals a concerning trend of increasing house-building costs across Australia. Over the
past year, these costs have soared, primarily due to the HomeBuilder Allowance introduced by the previous government
as a stimulus package during the COVID-19 pandemic. While the intention was to boost economic demand, the surge in
demand outpaced the supply of tradespeople and materials, resulting in skyrocketing costs.
Housebuilding costs, which were previously steady, have now reached historically high levels. This sharp increase has
put pressure on builders, who typically operate on low margins. The profit margins have shrunk due to the rising costs,
affecting their ability to turn building approvals into actual commencements. This has led to a gap between building
approvals and commencements, resulting in fewer new homes entering the market.

Implications for Homebuyers
The escalating house-building costs have significant implications for homebuyers. Firstly, it means that building a new
house has become more expensive, requiring individuals to cover the additional costs. This increased financial burden
can deter some potential buyers from pursuing their dream of homeownership.
Moreover, the entrenched high building costs have a direct impact on inflation. As prices continue to rise, it puts
upward pressure on inflation rates. This can lead to a cycle of increasing costs, as tradespeople and suppliers adjust
their contracts based on the prevailing market conditions. Ultimately, this affects the affordability of new homes,
prompting buyers to seek higher wages to keep up with the rising prices.

Effect on the Housing Market
The escalating house-building costs have significant implications for the housing market as a whole. The gap between
building approvals and commencements indicates a slowdown in new home construction. This is a concerning trend,
considering the surge in migration and the increasing demand for housing.
The shortage of new homes entering the market has contributed to rising rents and low vacancy rates. With over
500,000 migrants arriving in Australia in the past year, there is a pressing need to supply adequate housing. The
inability to meet this demand exacerbates the affordability crisis and puts additional strain on tenants and prospective
homebuyers.

Regional Market Performance
Now let’s shift our focus to the performance of different regions in Australia. By analysing data on house prices and
changes over several periods, we can gain valuable insights into regional market trends.

New South Wales
In New South Wales, the lower-priced western areas have shown the strongest growth over the past two years.
Locations such as Wagga Wagga and Dubbo have experienced price increases of 29% and 15%, respectively. These
areas offer affordability advantages, attracting buyers seeking more accessible housing options. Surprisingly, regions
like Wollongong and Ballina have underperformed, with slight declines in prices.

Victoria
In Victoria, lower-priced areas such as Bendigo and Latrobe have shown more subdued growth compared to New South
Wales. The Macedon Ranges and the Surf Coast, known for their lifestyle appeal, have experienced positive growth.
These regions have attracted buyers seeking a sea change or a green change, contributing to price increases.

Queensland
Similar to New South Wales, lower-priced areas in Queensland, such as Bundaberg and Fraser Coast, have seen
significant price increases of 37% and 34.9% respectively over the past two years. Toowoomba, a regional hub, has
been a standout performer with nearly 40% growth. These regions offer affordability and lifestyle advantages,
attracting buyers seeking a change of scenery.

Tasmania
Tasmania has experienced a more subdued performance in its major regions, with Hobart being a nonconformist. While
Hobart’s capital city market has shown slight declines, the surrounding areas have experienced growth. Launceston has
been the exception, with positive growth. Overall, Tasmania’s regional market has not experienced the same level of
growth as other states.

Northern Territory
In the Northern Territory, Darwin has outperformed Palmerston, with significant growth in median prices. Darwin’s
market has shown increases of 6.4% over the year, while Palmerston has remained relatively flat. These results indicate
a stronger market in Darwin and suggest a preference for properties in the capital city.
Auction Market Performance
Now, let’s shift our focus to the auction market performance, which provides valuable insights into buyer and seller
sentiment. While the market remains reasonably positive for sellers, there has been a slight cooling compared to
previous months.

Sydney
Sydney’s auction market continues to perform well, with a clearance rate of 73% and a steady number of auctions.
Although slightly lower than the peak levels seen earlier this year, it still reflects a seller’s market and higher prices.

Melbourne
Melbourne’s auction market has experienced a slight decline, with a clearance rate of 67.2%. This is one of the lowest
rates seen this year, indicating a cooling market. However, it is important to note that Melbourne’s market remains in
seller’s territory, albeit with a less intense pace.

Brisbane
Brisbane’s auction market has returned to a more typical result, with clearance rates in the range of 40% to 50%. While
lower compared to other capital cities, these results reflect a reasonably positive market considering Brisbane’s auction
culture and ongoing price growth.

Adelaide
Adelaide’s auction market has experienced a slight dip, falling below the usual 80% clearance rate seen throughout the
year. However, given Adelaide’s consistent performance, it is likely to bounce back in the coming weeks.

Canberra
Canberra’s auction market has shown some volatility, with fluctuations in clearance rates. However, it has rebounded
recently, indicating a reasonably strong market. The performance of the auction market in Canberra will be worth
monitoring in the future.

Conclusion
The rising house-building costs pose significant challenges for the housing industry, impacting homebuyers, builders,
and the overall economy. The surge in costs, driven by increased demand and supply chain issues, has made
homeownership more expensive and exacerbated the affordability crisis. The gap between building approvals and
commencements further hampers the supply of new homes, affecting the rental market and exacerbating the housing
shortage. However, regional markets have shown varying performance, with lower-priced areas often outperforming
higher-priced regions. It is crucial to monitor these trends and adapt strategies to ensure a sustainable and accessible
housing market.