_Cost of construction accelerates for builders across Australia
The Australian Residential Development Site Review’s objective is to provide an annual assessment of how development sites are shaping future residential markets, and to highlight opportunities and risks.
Most residential markets across Australia saw accelerating price growth throughout the pandemic. Developers were presented with an array of options, but also met with disruption, with further risks mounting on the horizon.
Developers play low-density card
The introduction of the HomeBuilder grant to support jobs in the residential construction sector three months into the pandemic saw a reinvigorated home-and-land market in growth corridors across the country. This was timely, as developers pivoted towards more low-density developments to lower their risk profile in a time of increasing uncertainty. This was most evident across Greater Melbourne.
First home buyer activity increased significantly over this time, to peak at a 29.8% share of all new Australian loans approved in January 2021 (ABS), before falling to 21.5% at the end of 2021 as applications for the grant closed in April 2021. However, there is still a focus on growing the first home buyer base with the announcement to extend the First Home Guarantee Scheme, a new Regional Home Guarantee Scheme and the Family Home Guarantee in the 2022-23 Budget.
Opportunity missed for build-to-rent sector
Residential vacancies continue to place pressure on the rental market across most cities and regional areas of Australia. The build-to-rent (BTR) sector, although not traditionally designed to combat housing affordability, could be one solution to designate more stock and stability for the rental market. This could be most prolific in chronically undersupplied markets like the Gold Coast, Adelaide and Perth with lower underlying land values, relative to major capital cities.
In 2021, some state governments stepped up to support, and stimulate, this emerging sector. Victoria will halve the land tax levied on BTR developments from 2022 through to 2040. This follows a similar tax break for BTR projects adopted by New South Wales (NSW), whilst the Queensland government has committed to support two BTR projects in Greater Brisbane.
Although at a national level, the 2022-23 Budget was a missed opportunity to review the ongoing taxation hurdle; by ensuring policy settings do not impede the flow of local and international institutional capital ready to be deployed.
Unfavourable conditions driving up construction costs
Logistics delayed within the supply chain, as well as limited availability of materials and labour, have accelerated the cost of construction for builders across Australia averaging 5.3% growth in 2021.
This has unfortunately seen several building companies dissolve in recent months across several cities. Severe weather events on the east coast are likely to amplify delays and costs in the coming year, impacting multiple sites across the entire country.
Houses becoming smaller as apartments get bigger
Largely driven by housing affordability constraints across Australia, average land lots being sold saw a reduction in size from 418 sqm in 2020, to 409 sqm in 2021. This was despite prices rising by 6.3% over the same time according to the UDIA. Following suit, CommSec found the average internal floor space for a standalone house condensed from 236 sqm in 2020, to 229 sqm in 2021. Yet, the average apartment floorspace expanded from 137 sqm, to 183 sqm, within this time.
Developers have shifted their focus to deliver larger apartments suited to owner-occupiers and longer term tenants, including families seeking low maintenance living, digital nomads working from home and ‘rightsizers’ - those downsizing to luxury apartments with house-like proportions.
Investors gaining market share
Although more owner-occupiers have been dominating the residential market in recent years, 2021 saw the split of investor loans grow by 75.1% (ABS). Over the same time, the share of international buyers purchasing new properties in Australia rose by 4.6%, rising 60 bps from a year ago (NAB).
Potential risks we’ll be monitoring
Across Australia, the three most important potential risks we’ll be watching over the coming year in the development space are concentrated around the pipeline and lending environment.
The first two risks go hand-in-hand — the ongoing escalation in construction costs impacting project delivery — as extended weather events further delay days on site, and extensive repairs to established homes draw tradespeople away from new builds.
Whilst the third hasn’t been on the radar for several years, but it will be imperative to monitor the impact on rising mortgage lending rates.
How has the residential development site market performed across Australia’s major cities and what are the potential risks ahead? Read the latest Australian Residential Development Sites Review 2022 here.