Australia’s home building boom is set to continue throughout 2022 despite the cost of labour and materials rising and pushing the cost of a new home higher.
In its latest economic and industry Outlook Report, the Housing Industry Association (HIA) revealed demand for new detached and multi-unit construction remained incredibly strong.
Sales since the end of HomeBuilder, which ran from April to October 2021, are the strongest they have been since 2017, when more than 115,000 detached homes started construction.
This means the expected slowdown post the government assistance boom is tipped to be mild.
Demand for units is also strong with approvals for multi-units 34.3 per cent higher in the September 2021 quarter than the same period last year.
HIA Chief Economist Tim Reardon said demand had remained strong because of economic lockdowns.
“Demand for new detached and multi-unit housing has remained strong, suggesting that the current boom in home building will be sustained throughout 2022,” he said.
“The industry will continue to run at capacity throughout 2022, constrained by the availability of land, labour and materials.
“Over the year to September, the price of skilled trades increased by 5.2 per cent, while the price of materials, as measured by the ABS, increased by 8 per cent.
“The price of residential land increased by 8.5 per cent in the 2020-2021 financial year, which has led to an increase in the cost of a new house and land package.”
It’s expected a record 148,880 detached homes will start construction in 2021, which is a 31.3 per cent rise on 2020.
A further 121,200 starts are tipped for 2022, which, while lower than 2021, is still 11.4 per cent above average for the decade to 2020.
Mr Reardon said the detached home building boom would come to an end when interest rates rise.
“This is expected to occur in mid-2023 and will push detached house starts to a trough of 96,930 in 2024,” he said.
“This trough is a solid 6.2 per cent above the last trough of 2012.”
Mr Reardon said there had also been a clear shift towards lower density housing during the pandemic and this trend showed no signs of slowing.
“This shift is not just those in units moving to detached housing, but includes a shift to fewer people per household,” he said.
The number of people per household has dropped from 2.8 people in the late 1980s to 2.5 people per household at the end of 2020.
“It’s likely that the pandemic accelerated this trend as households sought more space and lifestyle benefits, particularly after experiencing lockdowns,” Mr Reardon said.
Despite the swing to lower density, the demand for units has remained stronger than expected.
It’s anticipated that multi-unit starts will hit 76,440 in 2021, which is 8.9 per cent higher than in 2020.
This demand has stemmed from existing Australian residents.
“Demand from new residents and tourists is very weak,” Mr Reardon said.
“This is due to closed borders, but it is very likely that demand from existing residents is stronger than previously expected.”
Still, expected multi-unit starts are projected to fall to 70,130 in 2022, before climbing to 72,010 in 2023 and remaining steady in 2024, before growing again from 2025.
Other key takeaways
Australia’s population growth rate has fallen to its lowest level since 1916, with closed international borders meaning two years of population growth from migration has been lost.
Between March 2020 and August 2021 almost 200,000 more people left the country than arrived and those that did arrive were largely returning Australians.
These returnees were more likely to secure a detached house than an apartment in the city.
The loss of overseas migration was immediately felt in the multi-unit market when COVID-19 hit, as overseas students, tourists and migrants mostly stay in apartments in capital cities when they first arrive.
The 2021 Intergenerational Report forecasts migration levels to return to pre-Covid levels in 2024/2025, but says it will not recover lost ground.
Even when international borders reopen, mandatory quarantine will mean migration is slow.
People longing for a sea or tree change used the COVID-19 induced disruptions to make the move, particularly with remote working increasing.
Students and regional workers who would normally relocate to the cities also stayed put.
Brisbane and South-East Queensland had the largest influx of interstate migration, while many people left Melbourne for other parts of Australia.
“Even if migration was to return to pre-Covid levels, Melbourne will likely finish the decade with a smaller population compared to what was expected pre-Covid,” Mr Reardon said.
GDP, interest rates and wages
In the June 2021 quarter Australia’s economy was 1.6 per cent larger than in December 2019, and the Federal Budget forecasts this growth to continue with 4.25 per cent in the 2021-2022 financial year.
GDP growth of 2.25 per cent to 2.5 per cent is tipped for the following three years.
The RBA has forecast the wages growth rate to return to near pre-pandemic levels, of between 2 and 2.5 per cent, by the end of this year.
Wage growth is tipped to strengthen further, to about 3 per cent, by the end of 2023 on the back of an unemployment rate of about 4 per cent.
The HIA forecasts interest rates will rise in mid-2023.
“We believe interest rates will be below 2 per cent until at least 2025 and will be below 5 per cent in 2030,” Mr Reardon said.