Author: Karlie Wolfe, Andrew Downie and Matthew Jobson
The impact of Australia’s housing crisis is being felt across the country by investors, owner occupiers, renters, developers, financiers and policymakers. Two contributing factors to this situation are the country’s paucity of existing housing stock and its population growth – in other words, supply and demand.
ABS data shows Australia’s population growth is currently tracking at 1.6%, with an annual natural increase of 107,400 people and net overseas migration boosting the population by 315,900. While Australia’s rising population is contributing to the crisis, so are the too slow and too low levels of housing developments in the pipeline.
Built form residential developments, ranging from high-end developments through to affordable housing, are part of the solution. However, many approved projects are failing to get out of the ground because of the current financial feasibility challenges. The feasibility barrier is being fuelled by rising construction costs, ongoing supply chain issues, financing constraints and skilled labour shortages.
These factors are major contributors to the market inflection being experienced across the country, which is characterised by tight supply, rising demand and rising dwelling values.
Before COVID, the biggest risk built form developers faced was not securing the required pre-sales (commonly 110-120% on costs). In just 5 years, the risk profile has changed significantly. Builders and their financiers are now willing to start a development with pre-sales in the range of 50-60% on costs (usually on lower loan to value ratios) as long as they have comfort around the certainty of development costs and local market conditions.
Locking away building costs is currently the biggest challenge facing built form developers. Factors contributing to this issue include costs of various construction materials, supply chain disruptions with some materials being sourced from overseas, financing costs with uncertainty around future interest rate movements and local labour shortages. In part the labour shortages have been caused by significant government infrastructure projects around the country. Another factor is that wages can be higher in some states, so some workers will relocate to benefit from higher wages. Accordingly, cost contingencies are sitting around 5-10%, depending on the scale, complexity and type of project including building height.
This challenge is evidenced by the number of development sites that sit idle, despite having both development approvals and pre-sales in place. It is also reflected in the current trend for investors and developers to prefer development sites that offer holding income. Financiers also have a greater appetite for development sites with holding income as income can service interest costs in some cases.
Development feasibility issues are seen most readily in the context of affordable housing, as, despite the high levels of demand, it is hard to make the build costs work when there is an affordability price ceiling for the finished dwellings. Developers and financiers are also wary of settlement risk, given many of these projects are taking 2-3 years for development contracts to settle post construction phase.
However, in many markets around the country, dwelling values have been increasing so in most cases a higher sale price can be achieved if a contract fails to settle or a sunset clause date is not met.
In contrast, the prospects are promising for projects that can get out of the ground in markets that embrace the offered lifestyle because local demand is keeping values increasing. For example, there have been several luxury developments in Perth and the Gold Coast that are performing well on the back of local demand.
According to a recent ABC article, Australia will have a shortage of 300,000 construction workers by the middle of 2027.
While most Australian housing markets are experiencing labour risks associated with this shortage, one of the most pronounced capacity issues are seen in Perth. Many built form developers are struggling to attract and retain qualified tradespeople as they are competing with the mining companies and FIFO wages for Perth’s pool of skilled labour. Perth’s skilled labour capacity issue is likely to worsen as there are also several major infrastructure projects that have been announced for the city, including the new Women and Babies Hospital and a multi-billion dollar defence precinct at Henderson shipyard.
Another issue driving the skilled labour capacity shortage is that many builders are opting to become small-scale developers. For those builders, who can manage the labour risks with their own skills and networks, small-scale luxury townhouse developments and quick-turnaround renovations of houses and old apartment blocks are proving more attractive than working for wages.
The Australian Government’s 5% Deposit Scheme is making home ownership possible for many more Australians. More than 248,000 Australians have bought their first home with its support since 2020 and that number is likely to dramatically increase following the recent introduction of expanded eligibility.
While it is too early to see the newly expanded Scheme’s impact on values, there’s plenty of anecdotal evidence to suggest it is driving demand – and prices – for entry-level housing, including apartments, villas and townhouses. Investors are also competing in this space as tight rental conditions and rising values are resulting in attractive yields. New residential developments are also more attractive to investors due to lower initial maintenance costs and greater depreciation benefits to minimise their tax obligations.
House and land packages in outer suburban and regional areas are also proving popular for young families as work from home and FIFO work allow people to live where they prefer and/or can afford. For example, the recent Witchcliffe Ecovillage development south of Margaret River in WA has performed well.
For built form developers theycan get comfort on development costs, labour risks and fast-tracked approvals, this demand represents a significant opportunity for financially feasible projects.
matthew.jobson@opteonsolutions.com
karlie.wolfe@opteonsolutions.com
andrew.downie@opteonsolutions.com
DISCLAIMER
This article is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax or financial advice.
Liability limited by a scheme approved under Professional Standards