Home builders to weather the interest rate storm

Home builders are well positioned to handle higher interest rates, believing the events of the past two years have been more difficult to contend with.

HIA Chief Economist, Tim Reardon said there’s still a record volume of work for builders despite higher interest rates denting consumer confidence.

“The rise in the cash rate will have a minor impact compared to the events of the past two years,” Mr Reardon said.

“The fastest increase in the cash rate in almost 30 years will bring Australia’s home building boom to an end, but there is a significant buffer of building work to be completed.

“The increase in interest rates to date has caused uncertainty for households, but it is well within their capacity to absorb

“When the cash rate stabilises, confidence in the established and new home market will be restored quickly.”

According to Mr Reardon, since the first increase in the cash rate, there’s been a sharp fall in new home sales.

“The cost of building a new home has increased significantly over the past two years and was starting to limit demand for new homes,” he said.

“Rising interest rates will accelerate this slowdown.

“Despite a slowing in sales, there remains a record volume of work on the ground and a near record volume of projects still to commence construction.”

According to HIA, there were 131,730 detached starts in 2021/22, 6.7 per cent below last year’s record. 

Looking forward, housing starts will continue to slow down with 121,320 starts expected in 2022/23 through to a trough in 2024/25 of around 99,330 starts. 

There have been just 76,930 multi-unit starts in 2021/22, up 4.8 per cent from the previous financial year, but 35.1 below the peak in 2015/16. 

Multi-unit starts are expected to increase by 4.4 per cent to 80,270 in 2022/23 with a further 2.5 per cent increase in 2023/24.

Mr Readon said building costs are now starting to ease which should help provide a further buffer to builders.

“Material constraints that have plagued builders for the past two years are starting to ease and this will see the cash flow problems experienced by builders passed up the supply chain as the ‘bull whip effect’ plays out,” he said.

“The acute shortage of land will be a major constraint on building in 2023 and labour constraints are persistent.”

According to Mr Readon, the biggest concern for homebuyers is just how high the RBA will hike the cash rate.

“The uncertainty around how far the RBA needs to increase interest rates to restore inflation back to its target range has impaired consumer confidence,” he said.

However, Mr Readon believes there are already a number of short-term international factors that initiated the inflationary spike that are showing signs of improvement. 

“Reduced shipping costs and times have assisted the volume of exports and imports. Weakening demand is also emerging as interest rates rise across major economies,” he said.

“Despite the uncertainty around the cash rate, demand for new homes – especially multi-units – will be supported by low unemployment, booming export markets, an acute shortage of rental homes and a return of overseas migrants, students and tourists.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.