The inspiration for this article stems from a recent industry update that cited an Arcadis report, featured in The Australian newspaper highlighting the likelihood of further construction cost increases. Understandably, there is disbelief - surely, costs couldn’t rise again, could they?

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In this article, I’m not here to provide definitive answers but to offer insights into the current state of the construction industry in Australia, and to explore three key factors that will shape construction prices in the coming years:

1. Growing consumer demand as we await interest rate cuts from the Reserve Bank of Australia (RBA).
2. Government housing targets.
3. The record rate of builder insolvencies and its impact on supply.

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Part 1: The Impact of Growing Consumer Demand

To understand where we’re heading, we must first reflect on where we’ve been. Like many of us in the industry, I witnessed the rollercoaster of demand and shortages during the COVID-19 pandemic. In 2020, the Australian government introduced the HomeBuilder Grant, offering $25,000 to stimulate the renovation market. Demand for construction surged off the back of this, and resulted in a crippling of supply chains worldwide. This was no doubt emphasized by lockdowns throughout 2020 and 2021, with knock-on effects well into 2022. Construction prices skyrocketed in what felt like the Wild West of building.

At Sustainable Homes Melbourne, we were fortunate to have strong relationships with suppliers, to name a few; Provans Timber & Hardware and Rylock. Which enabled us to ride out the bumps and bruises of the seemingly never-ending price increases we encountered as an industry.

Since late 2021, demand has drastically decreased, reaching levels we hadn’t experienced in decades. The combination of rising construction costs and interest rate hikes caused consumer confidence to plummet, leading to a downturn that has left many builders struggling to maintain healthy project pipelines. Despite this, we’ve noticed a recent improvement in consumer confidence in the back half of 2024, which I suspect is a sign of things to come with forecasts predicting residential construction work to rise in calendar year 2025.

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Part 2: Government Housing Targets - A Lofty Goal

Another significant factor impacting the industry is the Federal government’s ambitious housing target: 1.2 million new homes by 2029. That translates to 240,000 homes per year. To put things in perspective, Australia saw just 143,000 new dwellings in the financial year 2023/24, far short of that target.

Several challenges stand in the way of achieving these targets:

• Planning approvals: The current system is tedious, slow and the frustration of many within the industry
• Labor shortages: Many workers and businesses have left the industry, and the small amount of new talent coming through does not have the capacity to fill those that are leaving.

At present, we are seeing only about 13,000 home approvals per month, well below the required 20,000 target. Without major changes to local government planning Australia will not get anywhere near the goal set. 

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Part 3: Builder Insolvencies - A Supply Crisis

Perhaps the most concerning trend is the record number of builders going insolvent. Since July 2021, over 6,000 builders have gone into administration. This devastating number affects the lives of builders, their creditors and homeowners caught in the crossfire but also puts a major strain on the industry’s capacity to meet growing demand.

Replacing these builders won’t be quick or easy. The process is slow and the liability of builders is high with many cautious of entering the market. Even with new builders entering the market, they often have much smaller capacities, managing only one or two projects per year. This stands in stark contrast to the multimillion-dollar capacities of the builders who have exited the industry.

What this means is that when demand surges, not if - the supply side of the equation will be severely limited. Builders won’t be able to ramp up capacity quickly enough to meet the government’s housing targets, exacerbating an already challenging situation. We may not see material supply shortages, though I expect labor and management shortages are inevitable.

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Conclusion: The Road Ahead

In summary, the Australian construction industry is facing a perfect storm:

1. Consumer demand is poised to take off once confidence returns.
2. Government housing targets are putting immense pressure on the industry to deliver, despite significant shortfalls in current approvals.
3. Builder insolvencies are reducing the sector’s capacity, with no quick solution in sight.

At Sustainable Homes Melbourne, we believe that while the challenges are significant, there are opportunities to navigate this complex landscape. Now more than ever, builders need to focus on strengthening their networks, managing costs effectively, and preparing for what’s to come.

For those considering new builds or renovations, now might be the perfect time to move forward, before demand and consequently, prices rise again.

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Written by Simon Clark

Director - Sustainable Homes Melbourne

Chairman - Sustainable Builders Alliance

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References:

• Arcadis Report 2024 via The Australian
• The Urban Developer: Building Costs Forecast to Soar in 2024
• Build Australia: Construction Cost Inflation Expected to Accelerate 
• ABC News: Australia to Miss 1.2 Million New Homes Target
• The Guardian: Housing Approvals Sink to 12-Year Low
• Australian Financial Review: Builders Going Insolvent at Record Rates