In a recent development that’s shaking up the housing markets of Sydney and Melbourne, the increase in the cash rate is making a significant dent, especially in the new home sectors of these two major Australian cities. This insight comes from the latest economic and industry Outlook report released by the Housing Industry Association (HIA), which includes updated forecasts for new home building and renovation activities across the nation, including each of the eight states and territories.
Tim Reardon, HIA’s Chief Economist, emphasized the unique challenges faced by Sydney and Melbourne. “The Reserve Bank of Australia’s rate hikes have not yet negatively influenced lagging indicators of economic activity such as unemployment or inflation. However, they are certainly hampering future home building activities,” he explained.
The report highlights a worrying trend: leading indicators of home building, including approvals and lending, have plunged to their lowest in a decade and have remained at these depressed levels throughout most of 2023. This downturn is expected to significantly slow down the construction of detached homes in 2024, leading to the lowest level of new commencements in over ten years, while also continuing to suppress apartment construction.
This slump in new home commencements stands in stark contrast to the goal of augmenting the housing stock supply, a critical need in the tightly squeezed rental markets of Sydney and Melbourne. The rising costs of delivering new house and land packages or apartments in these cities are exacerbating the impact of the cash rate increase.
“The boom in building driven by lower interest rates during the pandemic has ended, and a return to a stable market seems unlikely with the subsequent rise in the cash rate,” Reardon pointed out. He further noted that house building activity is expected to slow down in all regions, except for Western Australia, due to the burden of rising interest rates.
Although there’s still a significant volume of building work to be completed, this is expected to drag on economic growth and potentially increase unemployment rates. The cost of building materials and labor, though stabilizing post-pandemic, are unlikely to decrease substantially.
Reardon concluded with a call to action for governments. To counterbalance the rising costs of borrowing and to stimulate the commencement of new home constructions, he suggested that governments should focus on reducing the cost of shovel-ready land, attract more investment (particularly from overseas), and lessen tax burdens. This multi-pronged approach may provide some much-needed relief in the face of challenging economic times, particularly for prospective homeowners in Sydney and Melbourne.
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