Residential
Explore
The disconnect is becoming increasingly apparent. September's inflation figures showed that new dwelling prices were unchanged during the month, with builders increasing discounts and promotional offers to attract purchasers. This is despite ongoing increases in labour and materials costs.
Builders are finding themselves caught between rising costs and buyers who are increasingly unwilling or unable to pay higher prices. Higher interest rates are making the situation worse, reducing borrowing capacity while increasing the cost of financing construction.
Conditions are particularly challenging for apartment developers. Construction price growth for apartments and other residential buildings accelerated from 0.8 per cent to 1.3 per cent in September. Unlike detached housing, apartment developments generally require substantial presales before financing can be secured. Rising construction costs increase the prices developers need to achieve, while weaker demand makes those presales more difficult.
Recent government housing policy changes have done little to improve this situation. The decision to restrict negative gearing to new homes from July 2027 was intended to redirect investors towards new construction. While the proportion of investor lending going towards new homes has increased, our research shows that the actual number of these loans has declined. Investors are not moving into new construction in the numbers needed to offset weaker demand.
The ban on new SMSF borrowing arrangements for residential property, which took effect in August, has also removed a potential source of demand. While relatively small in the context of the overall housing market, SMSF investors can be particularly important for apartment developments that depend on investor presales.
The result is an increasingly divided construction sector. Government and data centre investment is supporting activity and keeping pressure on costs, while residential builders and developers are struggling to make projects financially viable. This will ultimately make Australia's housing shortage more difficult to address.
The challenge is that weaker residential demand is unlikely to ease construction cost pressures. Government projects and data centres are continuing to compete for labour and materials, regardless of what is happening to new home sales.
Australia now has a construction industry where some sectors are experiencing strong demand and rising prices, while others are struggling to find buyers. For residential builders, that is an increasingly difficult environment in which to operate.
