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As we delve deeper into 2023, it’s clear that the construction industry is going through a unique set of challenges and transformations.
Amidst an economic slowdown, rising inflation outpacing wage growth, and escalating government debt – the “perfect storm” according to renowned global construction consultancy firm, Rider Levett Bucknell – the landscape of the industry is evolving at a rapid pace. These rapid developments have created some significant challenges for borrowers and investors looking to build or renovate.
With construction costs decelerating, shifts in labour availability, and fluctuations in building activity and approvals, it’s more important than ever for potential builders to understand the current trends and how they may impact the success of their projects.
With Australia’s unsettled economic situation continuing to play out through 2023, the property market has continued to show limited property availability. This may drive some to consider building rather than buying, but, as we pointed out last year…. a lot of factors are in play that significantly impact the consistently high costs of construction.
So what’s going on in the construction industry right now and how might that affect you as a borrower? Click here to get a better understanding of what a construction loan is.
What’s affecting construction loans?
Construction Costs
Construction costs refer to the total expenditure involved in creating a building or structure, from sourcing materials to hiring labour. This includes all direct costs such as raw materials, labour, equipment and indirect costs like insurance, permits, and inspections. A significant proportion of these costs is typically covered by a construction loan.
In 2023, construction costs have experienced a slowdown, which could have a profound impact on borrowers. On the one hand, slower growth in construction costs could mean lower expenses for those looking to build, potentially making building a more appealing option than buying for some.
However, it’s important to note that ‘slower growth’ does not necessarily imply ‘low costs’. The costs remain high, they’re simply not increasing at the rate they were.
Moreover, a slowdown in construction costs could also indicate an economic downturn, which may result in tighter lending standards. Borrowers may find it more difficult to secure a loan or may face higher interest rates. It’s crucial to keep a close eye on these trends and seek advice from a trusted mortgage broker to understand how these dynamics could affect your specific situation.
The good news is that construction growth rates seem to have finally peaked. The rate of increase is significantly slower for 2023, although it varies from state to state, with the RLB report suggesting an estimated construction cost increase of around 4% in Sydney for this year and up to 7.5% on the Gold Coast.
With 2024 growth rates predicted to be lower again, this drop may be likely to help new development projects get underway.
Homebuilding and renovation projects will feel some relief too, although it may take longer to feel the benefits, given ongoing interest rate hikes, material costs, and labour shortages.
Nonetheless, CoreLogic’s Cordell Construction Cost Index (CCCI), which tracks the typical cost to build a new home, identified a 0.9 % growth rate for the first quarter of 2023 and 0.7% for the June quarter – the lowest rise since 2020. The annual index rose by 8.4% overall – a significant drop from the 11.9% of 2022.
If we look directly at cost, the average price of a Sydney build ranges from $2100 – $6400 per square metre, according to the RLB.
Short staffed
The ongoing labour shortage continues to impact the construction industry with investment developments and home builder industries alike struggling to find skilled workers to successfully complete building projects.
There are a variety of factors driving labour shortages ranging from increased government construction leaving fewer workers for the private industry, to ongoing climate concerns.
Wage pressure continues due to these labour market conditions, as firms attempt to capture or retain key staff, driving higher overall construction costs.
Construction industry commentators, however, are hoping that a positive outcome of the government’s increased skilled migrant uptake will be a gradual increase in the availability of skilled labourers and a consequent easing of the critical labour shortage that has plagued the industry.
Too much rejection: Building approvals and activity
Dwelling approvals or building permits, represent the official consent from a local government or regulatory body, allowing construction or significant renovation of a building. The number of dwelling approvals issued in a given period is a crucial indicator of future building activity.
Why does it matter to borrowers?
Dwelling approvals have a direct correlation with the real estate market’s supply and demand dynamics. An increase in dwelling approvals indicates an upsurge in construction activity, which may lead to an increase in the supply of new houses in the market. This could potentially ease housing prices, making it more affordable for borrowers to buy than to build.
Conversely, a decrease in dwelling approvals points to a slowdown in construction activity, which could limit the supply of new houses in the market. As a result, housing prices may increase, making it more expensive for borrowers to buy, thereby making construction loans and building a more attractive option. As such, keeping an eye on dwelling approval trends is essential for borrowers, as it can significantly influence their decision to build or buy.
Furthermore, for those considering a construction loan for a building project, the success of your dwelling approval application is crucial. A denied application can delay your project, leading to potential cost overruns and complicating your loan repayment plan.
In essence, the trends in dwelling approvals and the success or failure of individual applications can have a significant impact on a borrower’s strategy, financial planning, and overall success in the housing market.
Dwelling approvals slowing
Dwelling approvals in Australia are down 7.7% as of June 2023 according to the ABS (Australian Bureau of Statistics) although figures vary state-to-state and type-to-type, with the RLB 22/23 January YTD comparison putting Queensland residential approvals up 28.3% while NSW for the same month was at -21.3%.
This drop in approvals and building activity leaves some commentators hopeful this will flow through to prices via a reduction in pressure on material costs and labour supply.
It’s all just a bit expensive
The most obvious contributor to rising construction costs is down to the drastic increases in the cost of the materials themselves, such as timber, steel, glass and so on.
Ongoing shortages in materials due to supply chain disruptions, global demand and currency fluctuations have plagued the construction industry over the last few years, resulting in a significant increase in the cost of materials.
The increase in materials cost has slowed overall this year, although costs are still well above pre-covid averages.
Steel and timber prices, both in massive undersupply in previous years, have begun to stabilise. In the year to June 2023, steel product prices have dropped a significant -10.0% with timber following down -4.4%.
This is due to a variety of factors including an improvement in supply chain pressures as post-covid recovery continues. Improved costs and an easing of delays out of China should help stabilise the supply chain although the Russian-Ukraine war continues to contribute to supply chain issues.
While the availability of material is improving, on the ground it will still take a while for these changes to come into effect and begin to approach pre-COVID timeframes.
You’ve made it this far?
The construction industry is facing a complex blend of challenges – from material and labour shortages to fluctuating dwelling approvals – all of which directly influence the cost and feasibility of construction projects. However, these challenges also present opportunities for those savvy enough to navigate them correctly. By understanding how these factors interact, potential borrowers can make informed decisions about when and how to pursue a construction project.
At Yellow Brick Road (YBR) Home Loans, our team of experienced mortgage brokers understand these nuances and are well-versed in navigating the complexities of construction loans. We take pride in providing tailored advice to help you take advantage of opportunities and mitigate risks in the current market conditions.
So, if you’re considering a construction loan, why not book a chat with one of our mortgage brokers today? Let us help you turn these industry challenges into opportunities for your dream home project.
