Investment bank Macquarie Group has warned that residential construction activity is set to fall sharply as the existing pipeline of work is completed.
Macquarie analyst Peter Steyn says factors such as rising interest rates are impacting on front-end housing demand. He also expects a downturn in the home renovations sector in coming months as borrowers move from fixed-interest to variable rate home loans.
“We think the real pressure in Australian housing is still to come. The forward-looking perspective paints a worrying picture of weak front-end demand”, Steyn wrote on Wednesday.
“Front end housing demand is very soft as interest rates, and associated uncertainty, play havoc. Pipelines will likely begin to erode soon”.
“Australia faces delayed, and significant, pain”, he said.
Robert Lynch, executive chairman of ASX-listed home builder Tamawood, expressed similar concerns noting “most builders are finding it difficult to make sales at the moment” and “there is going to be a lull”.
The past 15 months has seen a wave of insolvencies across the home building industry, despite the pipeline of unfinished homes being larger than ever, as illustrated below:
These insolvencies have arisen because many builders signed fixed price contracts in response to the Morrison Government’s HomeBuilder stimulus, only to see their margins turn negative after building costs soared.
The Reserve Bank of Australia’s (RBA) record interest rate hikes have now crashed all forward-looking indicators.
Construction loans have crashed to levels not seen since the Global Financial Crisis in 2008:
New home sales have more than halved since the RBA’s first rate hike in May 2022:
And dwelling approvals have collapsed:
All of which points to a dire 2024 for home builders once the current pipeline of unfinished homes runs dry.
This situation is especially worrying for Australian tenants given the Albanese Government has ramped immigration to record levels.
Australia’s rental vacancy rate is already the lowest on record with rents soaring at a double-digit pace.
Therefore, the prospect of soaring demand via immigration meeting slowing housing supply can mean only one thing: further rental cost escalation and an increase in homelessness.
