The Federal Government’s Housing Accord target of 1.2 million new, well-located homes officially starts today and runs until the end of June 2029.
Last year, I was at a speech by Julie Collins, the Federal Housing Minister, and asked how come the government was confident they could achieve this target.
Her response was that they had spoken to the industry and were confident that the goal could be achieved.
I speak to a lot of people in the development and construction industry and I am yet to find anyone that thinks this target will be achieved and I sit firmly within that camp.
This is obviously very disappointing because we want more housing, particularly well-located housing, but the economics of new housing construction is tough to make stack-up under current conditions.
To reach 1.2 million new homes in five years means you have to deliver 240,000 new homes each year, which is 20,000 new homes every month for five years or 657 new homes each day for five years.
In the absolute best year for housing construction since the mid-1980s, 223,563 new homes were built over the 12 months to March 2017 which is still short of what needs to be achieved for the Housing Accord.
If we go back to what conditions looked like when the 223,563 new homes were built, official interest rates had been trending lower since late 2011 and were sitting at 1.5% compared to the 4.35% they sit at today.
Investors were a vital cog in making new housing construction, particularly apartments, viable and the share of new lending to investors over the previous five years (remember sales of new projects happen well before completions) were 37.3% of new lending in March 20217, compared to 29.9% over the past five years.
Without investor stock being constructed and purchased, you end up with what we are currently seeing, which is larger new apartment projects which are being built but consist of fewer overall apartments with the target demographic downsizers who want larger and more exclusive buildings.
It is important to highlight what the major impediments are to achieving the 1.2 million new homes.
Since the beginning of the pandemic, the cost of construction materials have increased by 33.4%. If you are building houses the cost to construct them is up 40.1% and is starting to rise again, while the cost to construct units and other types of residential properties is 23.2% higher and rising again.
Higher material and construction costs typically get passed-on to the purchaser and result in higher prices. As a result of this, the premium for new homes as opposed to existing properties is typically quite large and is seeing buyers’ preference existing properties.
The cash rate currently sits at 4.35% which is the highest cash rate since November 2011, more than 12 years ago.
A higher cash rate reduces borrowing capacities for buyers making pre-commitments harder to secure (especially given the heightened cost for new housing).
It also increases the cost of developer and construction finance narrowing margins making fewer new projects viable.
As previously mentioned, new housing is typically much more expensive at the moment than existing housing now in some areas of the country established home prices are rising rapidly reducing that gap (Brisbane, Perth and Adelaide) while in other areas they aren’t (Melbourne, Canberra and Hobart).
It isn’t just the price differential though it is the volume of stock available for sale. At the end of June 2024, the number of properties advertised for sale nationally was the highest it has been since late 2020 affording buyers much more choice.
More choice in the established housing market, when prices are much lower than prices for new, is likely to see the preference for existing persist.
On the other hand, if you had low stock levels and few new listings coming to the market then at some point buyers may come to the decision that they have no choice but to purchase a new home because they can’t find the right existing property.
The planning system is probably the impediment that people are most vocal about however, I think it is probably the one which is having the least impact on supply currently, though that’s not to say that improvements aren’t required.
Overly conservative restrictions on density and delays in development approvals reduce the volume of stock either coming to market now or able to come to the market in the future.
Further to this, excessive charges on new development increase the cost of new housing and they also make it more difficult to make new development feasible and to bring it to market.
While planning gets a lot of the focus we can see right now that there are a lot of approved sites which aren’t getting developed simply because they aren’t currently financially viable. Just because something gets approval it still must stack-up financially and if it is being constructed as build-to-sell it will still typically need sufficient presales to commence which is a challenge currently.
Without directly addressing each of these four impediments to new housing construction, the Housing Accord target has little to no chance of being achieved.
We need to reduce the cost of construction including the supply of labour required to build the housing we need and we need to enable developers access to the finance they need to proceed with projects.
We need to address the price differential between new and existing home prices and the planning system consisting of planning constrains and delays in receiving planning approvals need to be improved upon.
Until these challenges are addressed, I believe we continue to fall well short of the Housing Accord’s goal for new housing.
